Swiss ESG regulation: A legislative landscape in motion

Switzerland is not a member of the EU and therefore adopts its own regulation. Nevertheless, its regulation is often inspired by the EU regulation or even copied therefrom. In connection with ESG, Switzerland followed largely the approach of the EU, but overall has a more lenient regime than the EU.

The Swiss legislator introduced requirements for ESG-related matters, in particular disclosure obligations, which largely follow the EU regulation. With the adoption of these obligations, Switzerland follows the international trend to introduce mandatory rules on ESG matters, which often were previously recommended by private or international organisations as best practices. These recommendations still play an important role in Switzerland as Swiss law often refers to recognised international standards.

This article will focus on major Swiss ESG regulation topics which were recently the subject matter of legislation and explain the implications they have on companies.

Reporting and due diligence obligations are an important new pillar in the recent Swiss ESG regulation. As most of the rules are applicable for the first time this year (with reporting obligations for the first time in 2024 for the financial year 2023), many Swiss subject companies were and still are busy with the implementation of these rules. In particular, the collection of the relevant ESG data often requires additional sources and coordination within an enterprise, which had to be implemented prior to January 1, 2023 so that the relevant data may be collected for 2023.

The non-financial reporting obligations and the reporting obligations for commodities enterprises are only applicable to Swiss companies being subject to an ordinary audit. These are enterprises that (on a consolidated basis):

• Have equity securities listed on a stock exchange;

• Have outstanding bonds; or

• Are contributing at least 20% of assets or turnover to the consolidated balance sheet of a company according to (i) or (ii) (hereinafter ‘Larger Public Enterprises’).

These thresholds aim to exclude smaller Swiss enterprises for which such additional duties might constitute an undue burden.

Subject enterprises face some challenging questions given that the new regulation is kept rather generic and leaves companies with some room for interpretation. The following provides a high-level overview of the main disclosure obligations.

Larger enterprises domiciled in Switzerland and prudentially supervised large financial institutions are subject to the so-called Swiss non-financial reporting obligations. Companies qualify as larger enterprises in the sense of the law, when they qualify as Larger Public Enterprises and have at least 500 full-time employees per year and a balance sheet total of at least CHF20 million or a turnover of at least CHF40 million (in each case calculated on a consolidated basis in two consecutive years). The non-financial reporting obligations have applied since January 1, 2023 (with the publication of the report for the first time in 2024 in respect to the previous business year) and are laid out in the Swiss Code of Obligations.

The reporting obligations entail the publication of a report which includes information about environmental matters, particularly CO₂ targets, social and employment matters, respect for human rights and combatting corruption. The detail of each topic depends on a company’s business.

Swiss law expressly allows the use of internationally recognised standards. In particular, it mentions the guidelines of the OECD. When using a standard, the company must state in the report which standard it has followed and must make sure that all line items required by Swiss law are covered. Hence, if a standard requires less than Swiss law, the company is required to supplement the report with the information required by Swiss law.

In addition to the provisions in the Swiss Code of Obligations, the Swiss Federal Council recently published the ordinance about climate reporting, which aims to supplement the current rules. It is worth noting that this ordinance covers only climate reporting; the other topics, such as human rights, social or employment matters are not covered by this or another ordinance. In contrast to the provisions in the Swiss Code of Obligations, the ordinance will enter into force a year later on January 1, 2024.

The ordinance introduces a presumption that companies, which use the Recommendations of the Task Force on Climate-related Financial Disclosure of 2017 (TCFD) for their climate reporting, comply with Swiss law for climate related reporting. This presumption aims to encourage the use of recognised standards by implicitly recommending TCFD, but does not prohibit using a different standard. In case of the latter, companies must prove that they comply with Swiss law and, in case they do not follow a concept, explain the absence of a concept.

If a company applies the TCFD, the ordinance specifies the core elements of the TCFD, i.e., governance, strategy, risk management as well as metrics and targets. The strategy must include a transition plan, which is comparable to the Swiss climate goals, and where possible and appropriate, information in quantitative form, as well as the disclosure of the main assumptions for comparison purposes and the methods used. The metrics and targets include CO₂ goals and potentially goals for further greenhouse gases (in quantitative form), information on all greenhouse gas emissions as well as information on the comparability of the main assumptions and the methods used (in quantitative form).

The ordinance further requires the consideration of cross-sector and sector-specific guidance to the recommendations and, to the extent possible and appropriate, the Guidance on Metrics, Targets, and Transition Plans of the TCFD from October 2021. As the application of the Guidance on Metrics, Targets, and Transition Plans is not mandatory, but only applies if possible and appropriate, it leaves subject companies with considerable discretion.

Non-compliance with the non-financial reporting obligations might result in a fine. Persons who fail to produce a report, intentionally disclose incorrect information, or do not comply with the documentary obligations, face a fine of up to CHF100,000. The maximum possible fine is reduced to CHF50,000 if the person acts negligently.

Due diligence and reporting obligations in a subject enterprise’s supply chain regarding child labour and conflict minerals have been applicable since January 1, 2023. The said obligations are applicable in principle to all natural and legal persons as well as business partnerships, whose registered office, central administration (Hauptverwaltung) or principal place of business (Hauptniederlassung) is in Switzerland and who carry on a trade and therefore have a broader scope of application than the non-financial reporting duties. Swiss law provides for exemptions from this broad application. In the case of child labour, smaller enterprises and enterprises with low risks may be exempt from these obligations. Smaller enterprises are enterprises which do not cross two of the following thresholds on a consolidated basis in two consecutive years:

• A balance sheet total of CHF20 million;

• Turnover of CHF40 million; or

• A total of 250 full-time employees.

If a company offers products or services with the obvious use of child labour, the exemptions above do not apply. For conflict minerals, thresholds apply. Only enterprises which cross certain thresholds when importing or processing conflict minerals are subject enterprises. The exemptions and thresholds are laid out in the Ordinance on Due Diligence and Transparency in relation to Minerals and Metals from Conflict-Affected Areas and Child Labour.

Subject enterprises face numerous due diligence obligations on a best-effort basis. In particular, they must implement a supply chain policy, a system of traceability, a reporting procedure and a risk management process. Both prongs, child labour and conflict minerals, provide the possibility to comply with recognised standards to fulfill the Swiss legal requirements.

The board of directors of a subject enterprise is required to publish a report on an annual basis. In the case of conflict minerals, Swiss law requires a negative assurance from the auditors on the report produced by the subject enterprise.

For non-compliance, Swiss law provides fines of up to CHF100,000 if a person intentionally omits to produce a report or provides incorrect information in the report. For negligent acts or omissions, the maximum fine is lowered to CHF50,000.

While the above-mentioned duties are applicable only as of January 1 2023, the provision on reporting obligations regarding conflict minerals have been applicable since January 1, 2022 for Larger Public Enterprises as well as to larger companies. To be applicable, the Larger Public Enterprise must cross two of the following thresholds on a consolidated basis in two consecutive years:

• A balance sheet total of CHF20 million;

• Turnover of CHF40 million; or

• A total of 250 full time employees per year if they qualify as commodities enterprise.

Commodities enterprises are enterprises which are active in the extraction of minerals, oil or natural gas or in the harvesting of timber in primary forests. If a company is a group company of a parent company which already produces a similar report under foreign law, the group company is exempted from the obligations.

The reporting obligations require commodities enterprises to report on payments made by themselves or companies controlled by them to governmental agencies involving the extraction of minerals, oil or natural gas or in the harvesting of timber in primary forests. The report must only disclose payments with a value of at least CHF100,000 per financial year (either by a one-off payment or by several payments with an aggregate value of at least CHF100,000).

In case of non-compliance, Swiss law provides a fine for intentional omission of the reporting obligations or inclusion of incorrect information in a report and for failure to comply with the documentation obligations.

The Swiss Code of Best Practice (SCBP) is issued by economiesuisse and constitutes soft law as it is adopted by way of self-regulation. economiesuisse is an association representing Swiss businesses. Although the SCBP refers to ‘best practices’, it rather constitutes guidelines, which investors regularly expect to be met. Although the SCBP addresses larger Swiss companies generally, it is primarily tailored and adhered to by Swiss listed companies.

The SCBP was introduced for the first time in 2002 and was revised in 2014. The second revision was published in February 2023. While the revised SCBP primarily considers the Swiss corporate law reform, it also addresses recent developments in ESG matters.

In the following, a few key ESG-related changes are highlighted:

In terms of sustainability matters, the SCBP emphasises the shareholders’ right to comment on issues regarding sustainability, including social and sociopolitical matters. It further promotes increased interaction between companies and their investor base and suggests that the board of directors seeks a dialogue with shareholders and other key stakeholders on important matters.

The SCBP’s recommendations on conflicts of interest go beyond Swiss law requirements. Among others, the SCBP provides that each member of the board of directors should arrange their personal and business affairs in a way to avoid conflicts of interest. More importantly, the SCBP introduced an obligation to notify the chairperson in cases where there is only a proximity of interest, i.e., where the personal interests of a member merely affect (rather than outright conflict with) the interests of the company.

Given that Swiss law requires only the compensation committee as mandatory for Swiss listed companies, the SCBP lists the audit and nomination committees as additional committees. It also mentions further committees for corporate governance, sustainability, digitalisation and technology, innovation, risk, investments and ad hoc committees for specific transactions.

The SCBP introduced recommendations on risk management, compliance and financial monitoring. In particular, it mandates the board of directors to have an appropriate risk management system in place, conduct an annual risk assessment and monitor the company’s solvency.

Not surprisingly, the SCBP recommends that compensation should not only be competitive but also commensurate with market conditions. In addition, it suggests including a malus provision, i.e., a reduction in the compensation if certain objectives are not met.

Diversity Although the Swiss gender quotas entered into force on January 1, 2021 with a transition period of five years (for board of directors) and ten years (for executive management), proxy advisors apply the quotas as of January 1, 2023 and therefore, Swiss subject companies are advised to comply with these rules now.

The Swiss gender quotas are applicable to Swiss companies, which cross two of the following thresholds on a consolidated basis:

• A balance sheet total of at least CHF20 million; or

• A turnover of at least CHF40 million; or

• A total of 250 full-time employees.

The quota provisions require that each gender is represented with at least 30% in the board of directors and 20% in the executive management, but is based on a comply or explain principle. If a subject company does not comply with said thresholds, it must state the reasons for the failure to comply and list the measures it has implemented to promote the underrepresented gender. The gender quota is therefore not a hard quota in the sense that each subject company must comply with the quota because the comply or explain principle allows non-compliance.

As Swiss law does not further specify any requirements of the explanation or actions, this is not a high bar from a legal point of view. While Swiss law has therefore a rather soft approach, it will likely be deemed poor corporate governance and not accepted by proxy advisors and institutional investors if a subject company does not comply with the quota. Reputationally, it will be difficult to argue one has not found a female member of the board or the executive management and hence, the bar for non-compliance is de facto rather high.

Switzerland is not an island when it comes to ESG regulation. Although it does not adopt the EU ESG regulation in its entirety, the EU regulation serves as an important piece of guidance for the Swiss regulator, while Swiss law often takes a more lenient approach. With the recent changes, it is unlikely that the Swiss regulator will rest given the international ESG trends. Swiss companies may therefore expect further Swiss ESG regulation. What such regulation will entail and at what pace it will be implemented remains to be seen.