Planned changes to the Swiss provisions on non-financial reporting

The Federal Council (Bundesrat) recently published a preliminary draft amendment to the Swiss provisions on non-financial reporting, including an extensive, almost 50-page explanatory report. As a result of the amendments, the provisions would be applicable to significantly more companies. At the same time, the content requirements for the reports shall be, in some cases considerably, tightened and the reports are to be checked by the companies' auditors. The Federal Council's declared goal is to create internationally harmonized regulations that will bring Switzerland closer to the EU directive on sustainability reporting ("CSRD") in particular. At the same time, the stricter regulations seem also to have another purpose: The implementation of the roadmap under Art. 5 KlG that "All companies (...) (must) have net zero emissions by 2050 at the latest".

We take a look at the draft and explain which companies would be covered by it and what other significant innovations and restrictions the draft involves.

1. Extended applicability

According to the preliminary draft, significantly more companies are covered by the reporting obligation. It is estimated that instead of the previous 300, it would now be around 3,500 companies - in other words, more than 10 times as many as before.

Listing no longer a prerequisite

The background to this is especially that previously only entities of public interest were covered, i.e. in particular listed companies that, in addition, meet the threshold for employees (500) and either total assets (CHF 20 million) or turnover (CHF 40 million).

The draft now stipulates that companies that meet two of the three thresholds for employees (250), balance sheet total (CHF 25 million) and turnover (CHF 50 million) are also included. This means that a company that only exceeds the financial thresholds is also covered, even if it has fewer than 250 full-time employees; and a stock exchange listing (or other classification as entity of public interest) is no longer necessary.

As the report must, as before, be published electronically and remain publicly accessible for at least ten (10) years, this is a noticeable tightening for unlisted companies. In particular, unlisted companies - as "non-public companies" - have not previously been obliged to report publicly (and, in particular, not even have to publish their financial figures).

Comply or explain approach no longer applies

In addition, it is no longer possible to opt out of the reporting duty if the provisions on reporting apply to the company. Previously, there was a choice if the reasons why a company decided against reporting were explained (comply or explain approach).

Exceptions unchanged

The exceptions are now regulated in a separate article. However, their content remains substantially unchanged. For example, still only one report needs to be prepared within a group. In addition, no report must be prepared in accordance with Swiss law if an equivalent report has already been prepared in accordance with foreign law. However, it is still not defined which foreign laws provide for equivalent report. Reports in accordance with the CSRD should, however, satisfy the requirement of equivalence.

2. More extensive report content

The draft provides for more extensive provisions concerning the content of the reports. The following are particularly significant:

Net-Zero and 1.5°C global warming

Whereas under previous legislation it was sufficient to "report on environmental matters, in particular CO2 targets", it shall now be required to "report (...) on (...) environmental factors, in particular the status with regard to achieving the net-zero greenhouse gas emissions target by 2050 at the latest to limit global warming to 1.5°C above pre-industrial levels". Companies are therefore obviously expected to move closer and closer to the climate target of 1.5°C.

International coordination and focus on sustainability

The Federal Council's draft also takes a remarkable approach to the way in which information is to be provided on the climate target of 1.5°C described above, but also, for example, on the description of the business model, the corporate policy with regard to sustainability and the role of the highest management or administrative body with regard to sustainability aspects: The provided information must meet the standards used in the European Union or another equivalent standard for sustainability reporting which the Federal Council will designate. Companies may choose the preferred standard in this respect.

As a side note, 8 of the report's 9 required disclosures evolve around the topic of "sustainability".

3. Increased control

Until now, there has been no separate control of the reports. The preliminary draft now provides for a review by the auditors, as well as instruments to facilitate this review:

Examination by the auditors for discrepancies
The auditors should review whether there are any discrepancies between the annual and, if applicable, consolidated financial statements and the report on sustainability aspects.

Electronic format for easier review 
To enable the auditors to carry out the review efficiently, the report must be prepared in a uniform electronic format that corresponds to an internationally used standard, as is the case in the EU. The background of the electronic format seems to ensure simple, possibly automated, readability.

Double materiality assessment and review by auditors 
On the other hand, the double materiality assessment is retained and additionally emphasized by the planned revision. Companies should use this assessment to determine the sustainability aspects that are particularly material to them. For this purpose, a graphical representation is made in a two-axis (x- and y-axis) coordinate system. One axis shows the impact of the company's activities on certain sustainability aspects, while the other axis shows the impact of certain sustainability aspects on the company's business performance, business results and situation. The further a sustainability aspect deviates from zero, the more important it is. The draft also intends to emphasize that materiality can also result from a large deviation from the zero point on only one axis.

The graphical representation of key aspects makes it easier to compare reports from different companies than if they were presented (exclusively) in descriptive text form. Combined with machine readability in particular, this can significantly increase the transparency of the reports.

It is therefore not surprising that the explanatory report explains that the above mentioned audit should also be carried out based on the principle of double materiality to identify material inconsistencies between the financial and sustainability reporting.

No tightening of the criminal law provisions
Finally, it should be mentioned that the content of the provisions in the Swiss Criminal Code shall not be changed.

4. Conclusion

The draft provides for important amendments in three key aspects. Instead of 300, around 3,500 companies will be covered, which will also have to report more specifically than before and, for the first time, the reports will be subject to a review by the companies' auditors. In particular the latter is also new for listed companies.

The explicit reference to the net-zero greenhouse gas emissions target by 2050 as well as the climate target of 1.5°C and the frequent use of the term sustainability are particularly noteworthy. As mentioned in the introduction, Art. 5 KlG stipulates that all companies must have net-zero emissions by 2050. In this respect, the new version of the reporting obligation may path the way for further provisions which are likely to be gradually enacted to "nudge" companies to comply with the climate target.

In view of the stricter requirements, the deadline of two (2) years after the law comes into effect is appropriate. In any case, the draft law will first be submitted for consultation. The new regulations are therefore not expected to enter into effect very soon, which means that there is no immediate need for action.