In last year’s winter edition, we highlighted certain aspects of the new ESG rules in Switzerland, which have entered into force in January 2022. The first ESG reports according to the new Swiss rules must be published in 2024, covering the financial year 2023. This also means that the risk assessments and due diligence processes with respect to conflict minerals and metals (hereinafter referred to as ‘conflict minerals’) and child labour, and the required data collection, also with regard to the report on non-financial matters, must already be in place for 2023 – i.e., starting now. Unless one of the various exemptions applies, that is.
The framework of exemptions may seem quite complex, which is why this article aims at providing an overview and shedding light on the practical implications of the exemptions under the Swiss ESG obligations.
Companies that apply international ESG standards or regulations or are part of a group
The Swiss ESG reporting rules were developed to set minimum standards and increase transparency on certain non-financial matters, but also to avoid ‘double reporting’. Therefore, exemptions from the Swiss ESG due diligence and reporting obligations were introduced. However, companies should be cautious: the exemptions for the report on non-financial matters, the due diligence and reporting obligations regarding conflict minerals and regarding child labour differ from each other, and even if one or several of the exemptions apply, this does not mean that companies can completely disregard the Swiss rules.
- Report on non-financial matters: generally, large Swiss companies of public interest,such as listed companies and companies supervised by the Swiss Financial Market Supervisory Authority (FINMA), must publish an annual report on non-financial matters. Exempt from the obligation to publish a report on non-financial matters under Swiss law are companies that are controlled by another company which (i) also falls under the Swiss non-financial reporting obligations; or (ii) must produce an equivalent report under foreign law. The rules do not define what ‘an equivalent report’ means. The explanations of the Federal Department of Justice on the introduction of these rules only lists one example of an equivalent report under foreign law, which is the EU Directive on Non-Financial Reporting 2014/95/EU. It is hence safe to assume that Swiss subsidiaries of companies with domicile in a member state of the European Union which are obliged to publish a report under the EU regulation are exempt from the Swiss reporting obligations. In all other cases, an individual assessment of the equivalence of any foreign report from a Swiss law perspective is required.
- Reports on conflict minerals and child labour: there are two different potential exemptions for companies preparing or covered by a non-Swiss report regarding conflict minerals and child labour. First, the Swiss Ordinance on Due Diligence and Transparency in relation to Minerals and Metals from Conflict-Affected Areas and Child Labour (DDTrO) includes the same rules that apply with respect to the report on non-financial matters, also without defining what an ‘equivalent report’ under foreign law is. Given that the Swiss provisions regarding conflict minerals were drafted based on regulation 2017/821/EU and the rules on child labour are largely based on the Dutch law on child labour due diligence, we believe that reports produced thereunder should qualify as ‘equivalent reports’. For any other reports, again a case-by-case assessment from a Swiss legal perspective would be required.
The second (additional) exemption from the due diligence and reporting obligations under Swiss law applies to companies that adhere to internationally recognised equivalent regulations. Contrary to foreign equivalent reports, the ‘internationally recognised equivalent regulations’ are clearly defined in an exhaustive list in Annex 2 of the DDTrO. Importantly, it is not sufficient for companies to commit to adhering to any such internationally recognised equivalent regulations. Rather, they must publish a report naming the combination of international regulations applied, and implement the due diligence and reporting obligations under such regulations in their entirety. Otherwise, the respective Swiss obligations revive and failure to publish a report may be sanctioned in accordance with art. 325ter of the Swiss Criminal Code.
Swiss companies that are not part of another company’s consolidated report (under Swiss or foreign law) and do not apply any internationally recognised equivalent standards should identify as soon as possible (in case this has not already happened) which of the reporting and due diligence obligations apply to them.
With respect to some obligations and criteria, a one-time assessment is sufficient (unless at least one of the relevant factors changes) and any negative findings do not have to be documented or reported:
- A report on non-financial matters must only be published by Swiss companies of public interest (i.e., listed companies or companies supervised by FINMA) that, together with Swiss or foreign entities they control, exceed two of the three following criteria in two successive financial years: (i) 500 FTE; (ii) a balance sheet total of CHF20m; (iii) annual sales revenues of CHF40m.
- The due diligence and reporting obligations on conflict minerals only apply to Swiss companies (of any size) that import to and place in free circulation, or process in Switzerland any of the following minerals or metals, whereby they exceed the threshold quantities for the respective mineral or metal as per Annex 1 of the DDTrO: tin, tantalum, tungsten or gold.
- The due diligence and reporting obligations on child labour apply to Swiss companies exceeding, together with any Swiss or foreign entities they control, two of the three following criteria in two successive financial years: (i) 250 FTE; (ii) a balance sheet total of CHF20m; (iii) annual sales revenues of CHF40m. This exemption does not apply if the company offers products or services that have evidently been produced or provided using child labour.
Having said this, should a company be close to any of the quantitative thresholds, an annual re-confirmation of the respective obligations should be conducted.
For other obligations and criteria, an annual assessment is required, including the documentation of negative findings (i.e., findings that lead to the application of an exemption or the conclusion that there are no risks):
- Conflict minerals: Swiss companies which exceed the exempted maximum threshold quantities must assess on an annual basis whether the minerals originate from a conflict-affected or high-risk area. If this is not the case, such finding must be internally documented, but the reporting and due diligence requirements do not apply.
- Child labour: every year, Swiss companies that are not exempt due to their size must complete one or a series of assessments:
- First, they assess whether they qualify as a low-risk undertaking in relation to child labour, i.e., if they only purchase or manufacture products, or primarily procure or provide services, in countries whose due diligence response is rated as ‘basic’ by UNICEF in its Children’s Rights in the Workplace Index. If a company qualifies as a low-risk undertaking, this finding (including the reasoning) must be documented, but the reporting and due diligence obligations do not apply.
- Companies that do not qualify as low-risk undertaking with respect to child labour must annually check whether there are reasonable grounds to suspect child labour. In case there are no such reasonable grounds, this finding must again be documented, but the reporting and due diligence obligations do not apply.
Neither of these exemptions apply if a company offers products or services that have evidently been produced or provided using child labour.
Companies should be aware that even if the substance of the new Swiss due diligence and reporting obligations does not have to be fulfilled by a company, the initial determination whether or not the rules apply, and if a company falls under any of the exemptions, will take some effort. So will the set-up of processes to complete the required annual risk assessments and related internal documentation of negative findings. However, once in place, these processes can be kept lean and will be much less exhaustive than the due diligence and reporting obligations themselves.