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Craig Stevenson
Partner, Sustainability & Climate Change, PwC Switzerland
Dr. Philipp Thaler
Senior Manager, Sustainability & Climate Change, PwC Switzerland
On 23 November 2022, the Swiss Federal Council adopted the ordinance on climate disclosures that will come into force on 1 January 2024. The new rules clarify some reporting obligations but leave many details unspecified. This should not be misinterpreted as an invitation to ‘watch and wait’ as there are tangible indications in which direction the Swiss ESG reporting landscape is set to develop – with implications not only for those companies in scope of the ordinance.
The ordinance on climate disclosures is based on the indirect counterproposal to the Responsible Business Initiative (RBI), and provides guidance and clarity to large Swiss public companies, banks, and insurance companies on the disclosures they must include in their climate reporting. This is intended to increase transparency and make the non-financial reporting of companies more comparable.
Double materiality in climate reporting
It is important to note that the ordinance is not developed in isolation – key provisions and thrusts follow international trends of non-financial reporting. Fundamentally, it adopts two perspectives with the aim of providing stakeholders with a more comprehensive picture. On the one hand, public reporting should disclose the financial risk a company is exposed to due to climate change. On the other hand, it should reveal the climate impact of a company’s business activities. This so-called double materiality concept was first introduced by the EU in 2019 and is set to become best practice as it combines approaches of major existing and prospective ESG reporting standards.
The new rules implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) which have gained global and cross-sector acceptance in climate reporting. This hints at the Swiss Federal Council’s strategy to link domestic non-financial reporting obligations to international trends. At the same time, the ordinance also carries an important caveat as it does not prescribe a standard to disclose non-financial information. What is framed to constitute a ‘freedom of choice’ for in-scope Swiss undertakings may actually leave them in limbo. In the absence of guidance many businesses may look to developments beyond Swiss borders, where initiatives and standards are much stricter. This is not only a necessity for those Swiss companies in scope of foreign regulation, but a strategic decision for all others to gain a distinct competitive advantage.
Staying ahead of the curve
Many Swiss companies with significant operations in neighbouring countries will be required to comply with new European reporting standards. These tighter regulations will likely affect the economic playing field and impact even those Swiss companies without subsidiaries or branches abroad. This is because investors, consumers and non-governmental organisations are increasingly demanding detailed and comparable information on ESG. Even SMEs and other companies not in scope should therefore consider addressing sustainability disclosures, as large companies will increasingly demand such information (e.g., on Scope 3 emissions or EU Taxonomy aligned activities) from their suppliers. Complying with laxer Swiss rules may risk losing any competitive advantage. On the contrary, proactively disclosing non-financial information in line with international best practices can be used as an opportunity to stand out from the crowd and will ultimately strengthen one’s own internal processes and resilience.
EU regulations serve as a compass
Another reason to look for guidance abroad is the tendency of Swiss sustainability regulations to be geared towards developments in the EU. With the counterproposal to the Responsible Business Initiative (RBI) which came into force on 1 January 2022, Switzerland has sought regulatory alignment with the rules of the EU’s “Non-Financial Reporting Directive” (NFRD). However, from 2024 the NFRD will be replaced by the recently adopted Corporate Sustainability Reporting Directive (CSRD). Together with the newly developed European Sustainability Reporting Standards (ESRS), content, granularity, and format of ESG reporting will go well beyond what is required in Switzerland. This includes qualitative and quantitative information on the past as well as on the short-, medium- and long-term, material topics of the entire value chain, and targets linked to a specific date.
Similarly, the proposal of an EU Corporate Sustainability Due Diligence Directive (CSDDD) published in February 2022 sets higher due diligence requirements than the new Swiss obligations (see box for more information). The CSDDD foresees a more comprehensive approach that goes beyond “conflict minerals” and child labour. It extends to areas of environment and human rights, requires more extensive auditing, and expands potential liability. Swiss companies with significant activities in the EU must therefore consider compliance with the more far-reaching EU regulation – and many others may likely be impacted by the stricter foreign rules through public and market pressures.
Continuous alignment with the EU
On 2 December 2022 the Swiss Federal Council confirmed its intention to seek an internationally coordinated corporate sustainability regulation. Based on a report by the administration that analyses the effects of regulatory divergence with the EU on the Swiss economy, the Federal Council determined that a further course of action was needed. Tighter rules for sustainability reporting in the EU allegedly affect the export-oriented Swiss economy. The Federal Council therefore sees a need to adapt the Swiss regulations that will apply from the 2023 financial year onwards and seeks to prepare a consultation draft by July 2024 at the latest. Regarding supply chain due diligence, Swiss companies are likely to be affected by EU rules, too. Yet, as the CSDDD is still in the early phase of the legislative process, for now, the Federal Council intends to assess its impact on Swiss undertakings only by the end of 2023. These announcements indicate further regulatory alignment with the EU. They are also in line with provisions to review existing Swiss sustainability regulations with a view to international developments. The ordinance on climate disclosures is to be amended three years after its entry into force.
Key take-aways for Swiss companies
It would be wise to take a close look at regulatory developments in Switzerland and abroad when devising a sustainability reporting strategy. Much of the EU’s sustainability regulations are set to shape Swiss rules as the international regulatory landscape continues to evolve.
The impact of EU regulations on Swiss companies’ non-financial reporting includes:
A tighter scope: in the EU, companies with 250 instead of 500 employees fall under the regulation and also companies not publicly listed fall under non-financial reporting obligations
A more regulated reporting approach: among others, the EU prescribes a double materiality assessment and an external audit (limited assurance)
A stricter reporting format: the ESRS form a comprehensive sustainability reporting standard with more than 80 disclosure requirements and over 1000 data points
A more comprehensive due diligence: the EU’s approach extends to the areas of environment and human rights
For many companies, this means addressing ESG strategically, identifying long-term risks, counteracting them, and taking advantage of opportunities. As the demands on reporting systems and processes increase, so does the need for qualified staff to compile and analyse the necessary data.
Swiss sustainability regulations
In December 2021, the Swiss Federal Council enacted the legislative amendments of the indirect counterproposal to the Responsible Business Initiative (RBI). From the 2023 financial year onwards, public companies, banks, and insurance companies with 500 or more employees and at least CHF 20 million in total assets or more than CHF 40 million in turnover are obliged to report publicly on non-financial matters. As of 2024 in scope organizations also need to disclose on their climate impact, as specified in the ordinance on climate disclosures.
In addition, the RBI introduced due diligence and transparency obligations in relation to minerals and metals from conflict-affected areas and child labour. The requirements and exemptions which apply from the financial year 2023 onwards are specified in an ordinance. Among others, in-scope companies must set up a supply chain policy and management system that ensures traceability. Moreover, due diligence on minerals and metals requires an audit.
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