Corporate sustainability and contractual obligations imposed on Swiss SMEs: what can be done to level the playing field?

In recent years, the international business community and particularly the EU have undergone an expansion of the regulatory framework concerning ESG criteria, reflecting a broader shift in how companies and their stakeholders approach responsible business conduct. In the EU, the 2023 adoption of the EU Corporate Sustainability Reporting Directive (CSRD) and the 2024 adoption of the EU Corporate Sustainability Due Diligence Directive (CSDDD) imposed more comprehensive and integrated sustainability reporting requirements and broadened the responsibilities of companies. In Switzerland, new climate-related reporting obligations for certain companies under the Swiss Code of Obligations (CO) were enacted in 2022, which have been subject in 2024 to a proposed draft revision by the Swiss Federal Council, which has postponed any further legislative action until spring 2026 to consider ongoing EU developments, particularly the EU Omnibus package, adopted in its current form by the EU Parliament on 13 November 2025, which aims to streamline sustainability reporting requirements for companies.

Given these recent developments, EU sustainability laws could have a significant impact on Swiss SMEs. Under the CSRD, both listed companies and SMEs, including Swiss SMEs with securities listed on EU markets, subsidiaries of European groups, or those contracting with EU companies, fall within the CSRD’s regulatory scope. Swiss SMEs can also be affected by CSDDD provisions as contractors or subcontractors of reporting companies. In Switzerland, the CO also imposes direct and indirect sustainability duties on SMEs that are active in the minerals and metals sectors or those with business relationships with reporting companies.

From an investment perspective, evaluating ESG criteria as well as human rights and environmental (HRE) risks now represent a critical part of an EU investor’s due diligence in order to assess the corporate social responsibility (CSR) approach of a target company in which they are considering investing.

This signals a broader trend towards stricter compliance requirements for all companies, including non-EU companies.

Responsible contracts

According to the 2024 Investor Guidance on Responsible Contracting drafted by Interfaith Center on Corporate Responsibility (ICCR) and the Responsible Contracting Project (RCP): "Contracts take a company’s policies, which, on their own, are unenforceable, non-binding documents, and make them binding. Otherwise put, when HRE policies are incorporated in contracts, they become legally binding and enforceable. Contracts therefore make soft policies hard and make it possible for these policies to ‘go global’ by binding parties operating in different parts and legal jurisdictions of the world".

This statement highlights the critical role of contracts in transforming company policies into binding and enforceable obligations. This is particularly relevant for Swiss SMEs, which may face indirect legal obligations arising from their relationships as affiliates, co-contractors, or sub-contractors of entities falling within the regulatory scope.

Traditional contracts generally place broad sustainability compliance obligations on SMEs through side letters or annexes (i.e. "catch-all" clauses), while overlooking the stronger party's responsibility to manage its own actions and behaviours and leaving the SMEs little room to negotiate or challenge such clauses. In contrast, responsible contracts attempt to balance this dynamic by adopting a shared-responsibility approach, ensuring both parties are accountable for sustainability and human rights compliance rather than placing the burden solely on SME.

Responsible contracts are shaped by international non-binding frameworks such as the United Nations Guiding Principles for Business and Human Rights and the Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises on Responsible Business Conduct, which emphasise the identification, prevention, and mitigation of adverse impacts within supply chains.

This new responsible practice, however, also stems directly from regulatory laws. The CSDDD requires EU member states to ensure that companies comply with their duty of vigilance and take appropriate measures to prevent and mitigate potential adverse human rights, health or environment impact, by seeking contractual assurances from direct and indirect business partners that they will comply with a code of conduct or, if necessary, by developing and implementing prevention or corrective action plans.

If these measures are unlikely to succeed or have failed, and the potential adverse impact is severe, companies can, as a last resort, consider terminating the business relationship. To help companies comply with these requirements, the CSDDD mandated the EU Commission to adopt guidance on voluntary model contractual clauses by 26 January 2027.

In this context, the European Working Group for Responsible and Sustainable Supply Chains developed the European Model Clauses (EMCs), which are a set of model clauses aiming at assisting companies in meeting their CSDDD requirements as contracts with their value chain partners. A "Zero Draft" was circulated for consultation in 2024, and the first version, EMCs 1.0, initially announced for the end of the year 2025, has not yet been published.

The RCP, in partnership with the American Bar Association's Corporate Sustainability Law Committee and the UN Principles for Responsible Investing global initiative, has also developed the Responsible Investor Model Clauses (RIMCs), which are intended to help investors and portfolio companies to embed responsible business conduct standards directly into various investment agreements, such as shareholder agreements and purchase agreements. The RIMCs are based on a shared-responsibility approach, captured in what is called the "3Rs" of responsible contracting:

• Responsible allocation of risks and responsibilities: All parties agree to work together to uphold human rights and environmental standards with responsibilities allocated according to each party’s size, sector, influence, and context;
• Responsible purchasing practices: Buyers commit to practices that promote positive human rights and environmental outcomes, including fair pricing, reasonable deadlines, and adequate support; and
• Remediation First and responsible exit: If harm occurs, priority is given to remedying the situation for victims before resorting to traditional contract remedies. Contract termination is considered only as a last resort, and only after assessing and addressing the impacts of such an exit.

Stakeholder consultations on the RIMCs draft clauses ended in May 2025, with a first official version that has yet to be published. (The initial release was expected in the fall of 2025).

In the field of venture capital, which is traditionally opposed to sustainability considerations, some contractual solutions have developed with the emergence of "impact investment" strategies (i.e. investments made specifically to generate a positive, measurable social or environmental impact, as well as financial returns). In 2022, the Legal Innovation for Sustainable Investments Foundation (LISI) introduced the Impact Term Sheet to support this approach. The Impact Term Sheet is designed to make sustainable investment in startups more straightforward by providing free resources such as annotated term sheets, FAQs, glossaries, modules and regulations. It is notably based on a principle of reciprocity, which means that the parties should only request terms they would accept themselves. It also reverses some traditional venture capital practices, for example by allowing for upward adjustments in valuation after ex-post investment, promoting diverse and equitable board structures, offering alternative incentives based on achievement indicators rather than the traditional employee stock ownership plan (ESOP), requiring more comprehensive reporting (including climate transition plans), and limiting forced exits unless the acquirer maintains the startup’s sustainable mission. Several European impact investment funds have already adopted the Impact Term Sheet or similar frameworks, either in part or in full, and now apply them in their investment practice.

Conclusion

Given the evolving landscape of corporate sustainability regulations, Swiss SMEs could consider proactive strategies to manage the risks associated with potential adverse impacts on their contractual obligations. While challenging the validity of broad or excessive clauses in court may have a low likelihood of success, SMEs may still seek to negotiate more balanced terms during contract negotiations through responsible contracting, for example by including specific carve-outs, clarifying the scope of compliance obligations, seeking to limit their liability to what is reasonable and proportionate to the SMEs role and capacity, require genuine practical and financial involvement from companies who wish to impose these new obligations on them, or simply by suggesting using model clauses or term sheets such as the RIMCs or Impact Term Sheet in order to even out the balance of power.

By engaging transparently with contracting partners and documenting these efforts, SMEs may not only reduce their legal risks but also position themselves as reliable and responsible business partners.

For more information on corporate and M&A matters, contact your CMS client partner or the CMS experts who contributed to this article: Tania Luminuku, Senior Associate.