On the 26th of June, the Swiss Federal Government has initiated a consultation on its non-financial reporting, that will end mid of October.
The objective of the Federal Council is to align the Swiss regulation with the international ones, particularly the newly applicable EU Sustainability Directive, the CSRD[1].
Since 2023 the Swiss Code of Obligations - articles 964 a to c- puts some constraints on the Swiss listed companies above 500 FTE[2]: they need to report some ESG data or so-called “non-financial”[3] information. Starting in 2024, the Ordinance on the Climate dimension is also applicable to the Swiss companies.
200 Swiss companies are subject to the Code of Obligations requirements.
Refer to this document to get detailed information on what needs to be disclosed in the Swiss CO 964 a/c.
Besides the reporting disclosures, due diligence obligations in connection with conflict minerals and child labor, are also in place in Switzerland (ref. Code of Obligations 964 j/l).
The Swiss due diligence obligations are also being analyzed in regards of the CSDDD[4] in Europe to decide whether or not, they need to be amended to ensure interoperability with the EU ones.
THE CONTEXT
The new European Corporate Sustainability Reporting Directive impacts either directly or indirectly Swiss companies:
- DIRECTLY when some thresholds are reached on their European subsidiaries (Refer to this document for the thresholds).
The CSRD also applies to foreign companies generating more than 150 M€ net turnover.
140 Swiss companies are expected to fall under the extraterritoriality principle of the CSRD (source Federal Council)
- INDIRECTLY when their European clients or suppliers ask their supply chain’s business partners to provide them with sustainability data, respecting the ESRS standards (e.g. GHG emissions, transition plan, water consumption, adequate salaries or working conditions).
The Federal council anticipates 3’000 to 14’000 companies to be indirectly affected by the CSRD, and up to 50’000 in the future.
In Switzerland, we are NOT known for our love of regulations - and transparency-, and usually we prefer to adopt “self-regulation” as a corporate governance principle[5].
This is why initiating that kind of changes to improve transparency needs to be seen as a true AHA moment.
2. THE PROPOSED CHANGES
MAIN THREAD: FOSTER ALIGNMENT WITH THE EU
Here is the main evolution towards the CSRD:
The scope is enlarged to comply with the CSRD
Today only listed companies above 500 FTE, and 20 MCHF balance sheet or 40 MCHF net turnover for 2 consecutive years need to publish a non-financial report according to the Swiss regulation.
The Swiss Federal Council proposes to adapt the scope on the CSRD thresholds: corporates that meet 2 of the 3 following criteria for 2 years will need to make a sustainability report: 250 FTE, 50 MCHF net turnover, 25 MCHF balance sheet.
SME are not included into the scope except if they are listed (but micro listed corporates are excluded).
With these thresholds, 3500 Swiss companies will fall under the scope instead of the +-200 currently.
External audit becomes compulsory
Limited assurance will need to be performed by an independent third party to confirm the compliance with the standard used and improve the reliability of the information.
Today, the non-financial reporting does not need to be audited to comply with the Code of Obligations articles 964 a/c before being approved by the governing body.
Electronic Format & Digital Tag
Today, the Code of Obligations requires Swiss companies to publish their non-financial report online but does not mention any electronic format / tagged information.
In its consultation, the Swiss Federal Council refers to international electronic standard: the objective behind is to make the report both “human” and “machine” readable.
In the EU, the ESEF / XBRL taxonomy will be applied.
“Comply & Explain” is removed
The “comply and explain” possibility which exists in the current Swiss regulation is cancelled: companies must disclose their sustainability performances and organize themselves to report on an annual basis.
According to the current the Swiss Federal Department of Justice, an opting out may be justified if the non-financial report does not provide any meaningful information to stakeholders; For example, because the company has no or only very low risks or impacts on the environment, social issues or governance.
Double Materiality Assessment, value chain & Content specified
The current Swiss non-financial reporting is based on double materiality assessment – impact materiality & financial materiality-. The Ordinance on Climate also mentions that the climate disclosures need to include the company’s value chain when “possible & appropriate” (suppliers, clients, business partners).
According to the article 964b, the report “shall contain the information required to understand the business performance, the business results, the state of the undertaking and the effects of its activity on these non-financial matters”, but only to the extent necessary to understand its financial performances and risks.
This restriction is now removed to comply with the CSRD that clearly mentions material impacts need to be disclosed, although they might not trigger financial impacts or risks (current, potential). Same for the value chain – upstream & downstream- that should be part of all the ESG topics reported.
In addition, the current Swiss Code of Obligations does not go into great amounts of details in terms of what needs to be reported (e.g. no value point, indicator).
It states in a rather general matter that the report should address C02 targets, social and labor matters, human rights and anti-corruption measures.
The amendments proposed are more precise on the topics to be disclosed – e.g. climate, biodiversity, water – and data to be reported – e.g. transition/adaptation plan, objectives, due diligence-.
This reflects the Federal Council’s willingness to adopt an EU oriented approach.
Finally, the Swiss proposal also includes a change in the name of the reporting, and now refer to the sustainability reporting instead of the non-financial report.
Evil is in the details!
DISCREPANCIES WITH THE EU DIRECTIVE
Swiss corporates can select their reporting standards among international standards considered equivalent
Here comes the Swiss touch and the tricky part, which according to us, is in contradiction with the Swiss Confederation’s objectives.
On one hand, the Swiss Confederation claims it wants to improve transparency and actions towards a more sustainable economy, and on the other hand, it offers the possibility to companies to choose their sustainability standard between “equivalent” standards.
The Federal Council states that ESRS = GRI + ISSB
But those so-called equivalent standards are measuring pears and apples, and therefore are not equivalent.
According to the consultation, the Swiss Federal Council considers that the ESRS standards of the CSRD are equivalent to the GRI ones (Global Reporting Initiative) + ISSB (International Standards Sustainability Board, IFRS S1/S2).
This is not correct according to us:
- GRI is based on impact materiality (not financial one) and does not include any allocation, data points, thresholds to help companies measure and report their sustainability performances. GRI provides orientations, but it cannot be considered as a sustainability standard since it does not highlight data to be reported, indicators to be measured or provides clarity on how to assess material topics.
Consequently, each company using the GRI makes its own arbitration, and usually reports data and topics that are beneficial to them. This is the reason why the EU has issued its sustainability standards (12) to comply with the EU Taxonomy, part of the Green Deal.
Note, that ESRS is fully interoperable with the GRI & the ISSB but the contrary is not correct.
- Regarding the ISSB, IFRS S1/S2: they are only considering financial risks (impact materiality is not covered) and only concentrating on climate.
Planetary and social boundaries are not in included into their scope (except the GHG emissions).
The ISSB focuses on shareholders and financial players information and brings transparency on the ESG risks and their effects on the corporates financial value.
By giving the flexibility to choose its sustainability standards, the Swiss Federal Council will miss its objectives to bring clarity, reliability and comparability.
The consultation period will probably enable the various stakeholders to provide their feedback on the equivalence statement. We will provide our insights to the Swiss Federal Council based on our above analysis and advocate to use the ESRS standards to avoid confusion and limit reporting burden.
Extraterritoriality principle will not apply
The Swiss Confederation will not ask foreign companies making business in Switzerland to comply with the Swiss sustainability reporting disclosures, contrary to the CSRD that applies to non-EU companies.
3. APPLICABLE DATE = 2027
2 years after the changes are approved by the Federal Council.
If we consider that the consultation date will end the 17 of October 24, and if we take the assumption that the changes are approved before end of 2024, then the first report complying with the new regulation will have to be disclosed in 2027.
Notes :
[1] The Corporate Sustainability Reporting Directive.
[2] The thresholds are 500 FTE, AND a net turnover of 40 MCHF, OR a balance sheet of 20 MCHF for 2 consecutive years.
[3] The reporting is wrongly referred to as «non-financial” though the ESG impacts and risks have or might have consequences on the companies’ financial statements and valuation.
[4] Corporate Sustainability Due Diligence Directive.
[5] For instance, in the financial sector with the recent self-regulation provision.
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