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Are You Ready for the New Sustainability Obligations?

Andreas Jaeggi

Director, Head Digital Law | EY Switzerland

10 minute read 31 Dec 2022
Related topics
Law
Sustainability

The new transparency and due diligence obligations for Swiss companies apply for the first time to the 2023 financial year.

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In brief

  • Swiss companies are subject to new non-financial reporting obligations.
  • In addition, special due diligence and reporting obligations apply regarding so-called conflict minerals and child labor.

The topic of sustainability is becoming increasingly important in Swiss legislation. In recent years, various legislative and other initiatives have been aimed at minimizing the negative impact of business on climate and society and at obliging companies to comply with certain due diligence and reporting obligations - first and foremost the popular initiative "For responsible companies - to protect people and the environment" (so-called corporate responsibility initiative).

In the referendum of November 29, 2020, the corporate responsibility Initiative failed to reach the majority of the cantons’ votes. Due to an alternative clause, the counterproposal to the initiative adopted by Parliament was automatically approved. This imposes various transparency and due diligence obligations on Swiss companies regulated in the Code of Obligations, which came into force on January 1, 2022, and which apply for the first time to the 2023 financial year. In addition, at the end of November 2022, the Federal Council adopted the enforcement ordinance on reporting in climate matters, which will enter into force on January 1, 2024.

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These legislative amendments introduce reporting obligations for the companies concerned with regard to environmental, social, and employee concerns, respect for human rights, and the fight against corruption (so-called non-financial reporting obligations). In addition, special due diligence and reporting obligations apply with regard to so-called conflict minerals and child labor.

The following article outlines the key legislative changes. In particular, it discusses their scope of application and the resulting obligations that Swiss companies must fulfill within this framework. At the end of the article, you will find a graphic illustration that will make it easier for you to assess whether your company falls within the scope of the new statutory provisions.

1. Reporting on non-financial matters

Under the new legislation, companies are required to report on non-financial matters.

The reporting obligation applies to public interest entities that, together with the domestic or foreign companies they control, have an annual average of at least 500 full-time employees in the previous two financial years and have a balance sheet total of at least CHF 20 million or sales exceeding CHF 40 million. Public interest entities are mainly public companies, but also companies regulated by FINMA, in particular banks and insurance companies.

The companies concerned must essentially draw up a report that gives account of (1) environmental concerns, in particular CO2 goals, (2) social concerns, (3) employee concerns, (4) respect for human rights and (5) the fight against corruption. The report shall contain such information as is necessary for the understanding of the development and performance of the business, the position of the company and the impact of its activities on these concerns.

However, companies that are generally subject to reporting requirements are exempt from this obligation if they are controlled either by another Swiss company that is subject to reporting requirements or by a foreign company that is required to prepare an equivalent report. Equivalence is given, for example, if the controlling company has to report on the basis of Directive 2014/95/EU. With regard to environmental concerns, companies can also report based on the recommendations of the “Task Force on Climate-related Financial Disclosures” (G20 Financial Stability Board).

The report shall specifically include the following:

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2. Due diligence and reporting requirements in relation to conflict minerals and child labor

In addition to the general non-financial reporting obligations, the new regulations introduce specific due diligence and reporting obligations in the areas of conflict minerals and child labor.

 

2.1. Scope of application for conflict minerals

While the aforementioned general reporting obligations are limited to large as well as FINMA-regulated companies, the scope of application for conflict minerals is broader. All commercial companies with their registered office, head office or principal place of business in Switzerland are subject to the obligations.

Such companies must comply with due diligence obligations in the supply chain and report if they transfer conflict minerals into free circulation or process them in Switzerland.

The term «conflict minerals» means minerals or metals containing tin, tantalum, tungsten or gold, and their by-products, that originate from conflict areas. This includes areas, 

  • in which armed conflicts are being waged,
  • which are in a fragile situation following conflict, 
  • where governance and security are weak or non-existent and
  • where widespread systematic violations of international law, including human rights abuses, are taking place.  

However, companies that only import or process small quantities of conflict minerals are exempt from the due diligence and reporting obligations. The quantities that are considered as small are defined at the ordinance level and are to be looked at on a consolidated basis within the respective group.

Companies that adhere to internationally recognized equivalent regulations are exempt from the due diligence and reporting obligations. This includes, for example, the OECD Guidance on Conflict Minerals. In this case, companies cite the relevant set of rules in their report and apply them in their entirety.

 

2.2. Scope of application for child labor

Commercial companies with their registered office, head office or principal place of business in Switzerland are also subject to due diligence and reporting obligations under the new statutory provisions if child labor is suspected. Child labor in this context means that work is performed by persons who are below the minimum age for employment in the respective state.

In the case of obvious child labor, Swiss companies are in any case required to adhere to the due diligence and reporting obligations. Knowledge of the use of child labor must in this context be obtained from reliable, objective sources.

If, on the other hand, the use of child labor is not obvious, companies are subject to due diligence and reporting obligations if they exceed two of the following values in the two preceding business years:

  1. a balance sheet total of CHF 20 million
  2. sales revenue of CHF 40 million
  3. 250 full-time employees on an annual average

In this case, companies must first carry out a risk assessment and qualify the country of production of their products or services according to the indication of origin based on the "UNICEF Children's Rights in the Workplace Index". If the risk assessment reveals an "enhanced" or "heightened" risk of child labor, a suspicion investigation must be carried out.

If, on the other hand, the country of origin is classified as "basic," companies are exempt from the suspicion investigation detailed below and thus also from the due diligence and reporting obligations. However, they must document the extent to which they face a low risk in the area of child labor.

In a second step, companies must carry out a suspicion investigation. A reasonable suspicion of child labor exists if it is based on concrete internal or external indications. Such indications, concrete perceptions and suspicions can arise from internal (e.g., on-site inspections) or external sources (media reports, communications from authorities). If the investigation does not reveal any justified suspicion of child labor, the company is exempt from the due diligence and reporting obligations in the area of child labor. This finding must be documented in a clear and substantiated manner.  

If, on the other hand, there is a reasonable suspicion of child labor, the companies are subject to due diligence and reporting obligations.

However, also within the scope of application for child labor, it should be noted that companies that adhere to internationally recognized standards are exempt from due diligence and reporting obligations. These include the ILO Conventions 138 and 182 and the ILO-IOE Child Labor Guidance Tool for Business. In this case, companies must prepare a report in which they cite the set of rules and apply them in their entirety.

 

2.3. Due diligence and reporting obligations

The due diligence obligations consist of establishing and implementing an adequate management system. This is divided into the following phases:

In the area of conflict minerals, compliance with the due diligence requirements must then be audited by a licensed auditing company.  

Finally, the highest management or administrative body of the company must report annually on a consolidated basis on the fulfillment of the due diligence obligations in the area of conflict minerals and child labor. The report must be published electronically and remain publicly available for at least ten years.

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Acknowledgements

Special thanks to Dzemilje Murina for her valuable contribution to this article. 

Summary

Large Swiss companies must now provide an annual report covering the following five issues: environmental concerns, in particular CO2 goals, social concerns, employee concerns, human rights and corruption.  The law applies to large public interest entities, including regulated banks and insurers. Additionally, Swiss companies are subject to specific due diligence and reporting requirements for conflict minerals and child labor. Due diligence obligations consist of establishing and implementing an adequate management system, including the implementation of a supply chain policy, the development of a supply chain tracking system and risk analysis and specific measures to prevent or minimize adverse effects. 

About this article

Andreas Jaeggi
Director, Head Digital Law | EY Switzerland
Experienced digital law expert. Focusing on ICT and privacy law and assisting clients in their digital transformation journey. Enjoys a global and multilingual environment, both at work and privately.
Related topics
Law
Sustainability

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Limited, each of which is a separate legal entity. Ernst & Young Limited is a Swiss company with registered seats in Switzerland providing services to clients in Switzerland.