Main Multilateral Climate Change Regime
Switzerland has ratified the following major multilateral climate change legal regimes.
United Nations Framework Convention on Climate Change (UNFCCC)
Switzerland ratified the UNFCCC in 1993. At a later stage, Switzerland has also ratified the Kyoto Protocol in 2003 and the Paris Agreement in 2017 (see below).
As a member of the UNFCCC, Switzerland is closely involved in international negotiations on climate funding. Specifically, Switzerland plays an active role within the context of the Global Environment Facility (GEF) and the Green Climate Fund (GCF), to which Switzerland contributes a fair amount.
Additionally, Switzerland is involved in three other climate funds linked to the UNFCC:
Switzerland is part of the Environmental Integrity Group (EIG) comprised of Georgia, Liechtenstein, Monaco, Mexico, South Korea, and Switzerland in the UNFCCC negotiations. EIG strives to play a constructive role and tries to help find common ground between countries with different interests.
Under the Kyoto Protocol, industrialised countries committed to reducing their greenhouse gas emissions by an average of 5.2% compared to 1990 levels in a first period ranging from 2008 to 2012, generally known as the first commitment period. Switzerland committed to a reduction of 8%, the same amount as the European Union. Switzerland met its emissions reduction requirements under the Kyoto Protocol in the first commitment period
Switzerland also agreed to a second commitment period under the Kyoto Protocol (Doha Amendment). Specifically, Switzerland committed to reduce its emissions by 20% compared to the 1990 levels by 2020. Currently, it is not expected that there will be a third commitment period under the Kyoto Protocol.
The Paris Agreement
Under the Paris Agreement, Switzerland has committed to reduce its greenhouse gas emissions by 50% in 2030 compared to 1990 levels (Nationally Determined Contribution, NDC) and strives to cut greenhouse gas emissions to net zero by 2050.
Switzerland strives to reach the NDC in part by funding climate protection projects abroad. To this end, Switzerland is, amongst other initiatives, concluding a number of treaties that set the co-operation framework and state the requirements for recognition of the international transfer of emission reductions by the treaty parties.
Other Commitments to Mitigate Climate Change
Switzerland takes part in the UNECE Convention on Long-range Transboundary Air Pollution Transport and is a party of the Gothenburg Protocol. As part of the commitment under the Gothenburg Protocol, Switzerland reports annually on national emissions data related to black carbon that is part of fine particulate air pollution and contributes to climate change.
Switzerland also continues its participation in the Climate and Clean Air Coalition (CCAC) that promotes action on Short-Lived Climate Forcers. Short-lived climate forcers are substances such as methane, ozone and aerosols that remain in the atmosphere for a much shorter period of time than carbon dioxide (CO₂).
Apart from certain bilateral agreements and treaties – eg, in the framework of the Emission Trading System (ETS) – Switzerland does not participate in regional climate change legal regimes. In particular, Switzerland as non-EU member does not take part in the climate change initiatives of the European Union (such as the European Green Deal).
To achieve the mitigation goals and commitments set under the Paris Agreement and the net-zero target, Switzerland has adopted a long-term climate strategy towards 2050. This strategy sets key goals to be met by 2050 in the following sectors:
The remaining amount of (non-avoidable) CO₂ emissions is meant to be reduced by means of carbon capture and storage and by using negative emission technologies (ie, permanently removing CO₂ from the atmosphere). At this stage however, the relevant legal framework for the achievement of these mitigation goals has not been enacted, as a full revision of the CO₂-Act was rejected in a popular vote in 2021 (see 3. National Policy and Legal Regime (Mitigation))
Regarding adaption to climate change, Switzerland has already implemented most of the requirements under the Paris Agreement. Based on the existing CO₂-Act, the Swiss Federal Council endorsed a two-part adaption strategy for Switzerland (see 4. National Policy and Legal Regime (Adaptation)).
Climate finance is an essential part of Switzerland’s international climate policy and Switzerland contributes an appropriate share to the Global Environment Facility (GEF) and the Green Climate Fund (GCF). Switzerland is also a board member of both of these organisations. In addition to public financing, Switzerland has developed a strategy to mobilise private finances for climate protection activities in developing countries in 2019.
Concerning emissions trading and compensation, the CO₂-Act requires some operators to participate in the ETS, especially aircraft operators and greenhouse gas-intensive companies (see 3. National Policy and Legal Regime (Mitigation)).
Moreover, Switzerland has concluded a number of bilateral treaties on emission reductions and carbon storage abroad, as the Paris Agreement foresees that emissions reduction can be achieved by funding climate protection projects abroad. These bilateral agreements serve as a legal basis for commercial contracts between buyers and sellers of emission reductions.
Switzerland’s climate policy is based on Article 74 (environmental protection) and Article 89 (energy policy) of the Swiss Constitution. Article 74 gives the Confederation the competence to legislate on the protection of the population and its environment against damage or nuisance. Article 89 paragraph 2 states that the Confederation shall establish principles on the use of local and renewable energy sources and on the economic and efficient use of energy. Neither Article 74 nor Article 89 provide a specific framework for the implementation of climate change regulation.
However, the aforementioned articles of the Swiss Constitution serve to grant the Swiss legislature (Parliament) the competence to enact laws to protect the population and environment against the consequences of climate change. The Swiss Parliament has done so by implementing the Federal Act on the Reduction of CO₂ Emission (CO₂-Act) that – together with the Ordinance on the Reduction of CO₂ Emissions (CO₂-Ordinance) – form the legal basis of Switzerland’s national climate policy.
CO₂-Act and CO₂-Ordinance
The CO₂-Act and the CO₂-Ordinance implement Switzerland’s international climate obligations under the Kyoto Protocol and the Paris Agreement into national law and define objectives, instruments, measures and general rules for the implementation of climate policy.
The over-arching aim of the CO₂-Act is the reduction of greenhouse gas emissions that are attributable to the use of fossil fuels as energy sources and to limit the global rise in temperatures to less than 2 degrees Celsius (Article 1) and states that domestic greenhouse gas emissions must be reduced by 20% by 2020 and by a further 1.5% annually until 2024 (compared with 1990 levels; Article 3).
A complete revision of the CO₂-Act that would have strengthened Switzerland’s climate protection measures was meant to enter in force in 2022. The revised CO₂-Act included various additional measures to fight climate change, such as
However, in June 2021, Swiss voters rejected the revised CO₂-Act in a close referendum.
Future revision plans
As some of the measures of the current CO₂-Act were limited to 2022, the Parliament enacted a prolongation of the currently existing measures through a minor revision of the CO₂-Act and its CO₂-Ordinance following the rejection of the revised CO₂-Act in June 2021. This minor revision is meant to bridge the gap until the adaption of a revised CO₂-Act in 2025 that will aim at culling the greenhouse gas emissions by 50% until 2030.
While the CO₂-Act provides that the reduction targets shall be achieved, as a first priority, through measures set forth in the CO₂-Act, additional measures in the fields of environment and energy, agriculture, forestry and timber, road traffic and taxation of mineral oil shall contribute to achieving the reduction target as well (Article 4). Therefore,
will be important co-contributions for the Swiss climate change regime.
The key regulatory authority concerning climate and climate change is the Federal Office for the Environment (FOEN), which is a sub-department of the Federal Department of the Environment, Transport, Energy and Communications (DETEC). The Climate Division of the FOEN is responsible for:
The Climate Division is further subdivided into four sections:
Additionally, the Swiss Federal Office of Energy and the Swiss Agency for Development and Co-operation are important for some aspects of climate change policy development.
The CO₂-Act has the primary aim of reducing the emission of greenhouse gases with a reduction target of 20% by 2020 and a further 1.5% annually until 2024 (compared to 1990). To achieve this goal, the CO₂-Act provides for the following core measures, which are further specified in the CO₂-Ordinance.
Technical Measures (Articles 9–13, CO₂-Act)
The CO₂-Act implements technical measures to reduce CO₂ emissions with regard to (i) buildings and (ii) passenger cars, vans and light articulated vehicles.
Concerning buildings, the CO₂-Act states that the cantons are responsible for implementing rules to mitigate CO₂ emissions from buildings that are heated with fossil fuels (Article 9), but does not specify these measures and leaves room for their implementation.
As to passenger cars, vans and light articulated vehicles, the CO₂-Act regulates that the importer or manufacturer of these vehicles must reduce the average CO₂ emission of the vehicles it imports into or manufactures in Switzerland (Article 10). To ensure this, an individual target is calculated for each importer or manufacturer of vehicles. If the average CO₂ emissions of an importer’s or manufacturer’s passenger car fleet exceed this individual target, the importer or manufacturer in question must pay the federal government a legally defined amount as a penalty (Article 13)
Emission Trading System (ETS, Articles 15–21, CO₂-Act)
The CO₂-Act states that operators of installations that belong to a specific category and which cause high greenhouse gas emissions (eg, combustion of fossil fuels, production of aluminium) and operators of aircrafts (Article 16–16a) are required to participate in the ETS. Furthermore, certain operators of installations that cause high or moderate greenhouse gases can participate in the ETS on a voluntary basis.
The ETS in Switzerland works in such a way that each year, a maximum amount of newly available emission allowances are specified in the ETS (Article 18). Some of the allowances are then allocated free of charge, while others are auctioned (Article 19). Each year, the participants have to cover their actual emissions with an adequate amount of emissions allowances. Therefore, the participants in the ETS are able to use their allowances for their own emissions or to sell them to other ETS participants. With these mechanisms, emissions should be reduced where doing so is most cost-efficient.
Compensation for Motor Fuels (Articles 26–28, CO₂-Act)
In the case of motor fuels, the CO₂-Act regulates that any person who distributes motor fuels for consumption must compensate for part of the CO₂ emissions that are attributable to the use of motor fuels as an energy source. Failure to compensate the CO₂ emissions leads to the payment of a penalty.
CO₂ Levy (Articles 29–38, CO₂-Act)
The CO₂-Act stipulates that the federal government imposes a CO₂ levy on the production, extraction and import of thermal fuels. The revenues generated from the CO₂ levy shall be used to reduce CO₂ emissions from buildings, for the promotion of technologies for reducing greenhouse gases (technology fund). Any excess shall be redistributed to the general public and the economy.
Following mitigation, adaptation to climate change is the second pillar of Swiss climate policy. Article 8 of the CO₂-Act states that “the Confederation co-ordinates measures to avoid or deal with the harm to persons or damage to property of substantial value that may be caused by the increased concentration of greenhouse gases in the atmosphere.”
In compliance with Article 8 of the CO₂-Act, the Federal Council created a strategy for the adaption to climate change in Switzerland in 2012. The adaptation strategy is based on the most important challenges arising directly from the effects of climate change in Switzerland (eg, greater heat stress, increasing summer droughts, increased risk of flooding, a rising snowline, and changes in habitats, species composition and landscapes).
Implementation of Adaption Strategy
To implement the adaptation strategy, the Federal Council adopted a first action plan for the years 2014–19, at the same time instructing the Federal Department of Environment, Energy and Communication to carry out a biennial report on the implementation of the measures. A second action plan for the years 2020–25 was then elaborated and adopted by the Federal Council.
The action plan 2020–25 is an extensive, non-legal strategy paper containing 75 measures at the federal level in the following areas:
Since the measures concern a wide variety of already regulated areas, the following Federal Offices (co-ordinated by the Interdepartmental Committee Climate) have contributed to the strategy and measures:
Furthermore, to strengthen the federal collaboration by providing a knowledge hub for climate change adaption, the National Centre for Climates Cervices (NCCS) was established in November 2015. The NCCS provides information and data on the past, present and future climate and its consequences for the environment, economy and society.
According to Article 6 of the Paris Agreement, countries may count reductions achieved abroad towards their emissions reduction commitments. The emission reductions achieved in this way must promote sustainable development in the host country and may not already be claimed by another country.
Since 2020, Switzerland has concluded several treaties with other countries that establish the basis for implementing the compensation scheme under Article 6.2 of the Paris Agreement. Specifically, there are currently treaties in place with Peru, Ghana, Senegal, Georgia, Vanuatu, Dominica, Thailand, Morocco and Chile.
The reduction target for 2020/2021 had been achieved almost exclusivity with domestic measures alone. However, companies that are exempt from the CO₂ levy may count a limited amount of foreign certificates towards their reduction obligation. These are issued in accordance with the international procedure set out in the Kyoto Protocol for additional emissions reductions that can be proven to have been achieved through climate protection projects in developing countries (Clean Development Mechanisms, or CDM). In Switzerland, these certificates must also meet the quality requirements of Annex 2 of the CO₂ Ordinance.
In summer 2021, the European Commission presented the “Fit for 55” legislative package. One of the proposals therein is the Carbon Border Adjustment Mechanism (CBAM) that will introduce a carbon price on certain products imported into the EU. The new law mostly targets countries with lower environmental thresholds.
Switzerland has been levying an incentive tax on fuels since 2008 and has linked its ETS to the EU’s system since 2020. Due to this, exports from Switzerland are exempted from the current draft of the CBAM. The CBAM would therefore have little impact in this regard on Swiss companies doing business in the EU.
Switzerland is following developments within the EU closely and a first exchange with the EU Commission to implement an adjustment mechanism at the border has taken place. According to some opinion leaders, Switzerland should introduce a similar tax as the EU, to prevent products from countries with lower environmental thresholds from entering the EU after transiting through Switzerland. As discussions on the implementation of the CBAM are ongoing, it cannot yet be specifically assessed if and to what extent the CBAM will exactly affect Swiss entities and the transport of goods through Switzerland.
Since the establishment of the Task Force on Climate-Related Financial Disclosures (TCFD) by the Financial Stability Board (of which Switzerland is a member) at the end of 2015, the TCFD has heavily influenced Swiss policy and regulatory positions on climate change reporting.
Already, at the end of 2020, the Federal Council had presented proposals on how to strengthen Switzerland’s role as a global leader in sustainable financial services. In this context, the Federal Council called on Swiss companies from all sectors of the economy to implement the TCFD recommendations on a voluntary basis. At the same time, it was decided that an ordinance should be implemented to make the TCFD recommendations binding. On 12 January 2021, Switzerland opted to become an official supporter of the TCFD.
Banks and Insurances
In May 2021 the Swiss financial market regulator (FINMA) amended its “Disclosure – banks” and “Disclosure – insurers” circulars. The amendment requires large banks and insurance companies under FINMA’s supervision to describe the major climate-related financial risks and their impact on the business strategy, business model and financial planning. In addition, they must disclose the process for identifying, assessing and managing climate-related financial risks as well as quantitative information (including a description of the applied methodology) on their climate-related financial risks. The new requirements were based on the TCFD recommendations.
New Climate Reporting Obligations
Moreover, the Swiss Federal Council initiated the consultation on the Implementing Ordinance on Climate Reporting for large, Swiss listed companies in March 2022. The draft Ordinance specifies climate-related reporting obligations, which are part of more general reporting obligations on non-financial matters. The draft Ordinance is expected to enter into force at the beginning of the financial year 2023 and clarifies that companies required to report on non-financial matters will be deemed to have fulfilled their obligations with respect to climate reporting if they follow the recommendations of the TCFD for large Swiss companies.
As a general matter, potential liability of directors for Corporate Climate Responsibility (CCR) has received less attention in Switzerland than in common law jurisdictions where scholars intensively debate directors’ responsibility and liability in connection with climate change and climate risks.
General Liability Scheme
According to the director’s liability scheme set forth in Article 754 of the Swiss Code of Obligation (CO), directors can be held liable for damages suffered by the company and/or the shareholders if a number of requirements are met including in particular that a director must have breached their duty of care and that such breach has led to a damage suffered by the company or the shareholders.
The requirement which is considered most difficult to scrutinise and to fulfil is the breach of a board duty. According to Article 717 of the CO, the board of directors is required to safeguard the interests of the company in good faith. The CO does not, however, set forth an explicit obligation of the board of directors to pursue interests other than those of its shareholders.
Nevertheless, among Swiss scholars, the CCR is often discussed in the context of whether the sole objective of a company is to create value for its shareholders (so-called shareholder primacy) or whether the board mandate includes a duty to safeguard the interests of other stakeholders (so-called stakeholder approach).
Some Swiss scholars assume that external environmental effects are regulated exclusively by the framework of environmental legislation rather than by extending the duties of the board of directors to include a duty to protect environmental interests. Following that school of thought, the board of directors should not accept costs in order to pursue stakeholder interests that are not offset by a corresponding increase in the value of the company.
As opposed to this, other scholars maintain that a company must pursue three goals simultaneously in the sense of a triple bottom line:
Corporate Governance and Duty of Care
With regards to this controversy in the legal doctrine, the latest version of the “Swiss Code of Best Practice for Corporate Governance” provides some clarity, as this version does not solely focus on shareholders’ interests but on the “entirety of principles geared to the sustainable interests of the company”.
According to the CO, the board of directors is obliged to define the overall strategy and to perform the overall management. This general definition of board duties and obligations leads, for example, to the specific duty to implement and monitor an internal control system and a functioning risk management system designed to ensure systematic handling of internal and external corporate risks (in particular liquidity, credit, market, operational and reputational risks). Further, the board of directors is obliged to set up a compliance system, which ensures compliance with legal requirements regarding the protection of human rights and the environment.
When pursuing its duties and tasks, the board of directors has further a duty of care. According to some scholars, the duty of care includes a duty to implement the principles of contemporary corporate governance adapted to the specific circumstances and corporate governance recommendations are to be consulted as interpretative aids. In the context of CCR, the TCFD recommendations and the OECD Guidelines would be particularly appropriate for specifying due diligence obligations.
In view of the aforementioned duty of care, it seems more and more important for the board of directors to take long-term developments such as climate change into account and promote a sustainable long-term corporate strategy that is fully aligned with all relevant standards and regulations.
The current law provides for a liability scheme that could lead to the liability of the board of directors in connection with the realisation of climate risks. Irrespective of the academic dispute between shareholder primacy and the stakeholder approach, climate risks increasingly pose legal liability risks for board members.
Due to the lack of relevant precedents (or even pending lawsuits) in Switzerland, the liability risks may still be perceived as moderate today, in addition procedural hurdles are high. However, the economic significance of climate risks suggests that liability risks are increasing. Further indications are the expectation of stricter regulations (in Europe as well as in Switzerland) and the increasing pressure from institutional investors. In order to mitigate liability risks in the climate context, board members are well advised to properly identify company-specific risks and opportunities of climate change, report on them adequately and implement appropriate measures – all in compliance with their duty of care.
Separation of Company and Shareholder/Company and Subsidiary
Swiss law sets forth the principle of strict separation between a corporation limited by shares and its shareholders as well as between corporations connected to each other in a holding structure. As a consequence, shareholders and parent companies can only be held liable for damages caused by the company or their subsidiary in exceptional cases.
Piercing the Corporate Veil
A shareholder can only be held directly liable for damages caused by the company to the extent the corporate veil is pierced, which is only the case under exceptional circumstances. According to the relevant case law, the shareholder of a company may be held liable irrespective of the liability shield of the legal entity, where:
Similarly, a parent company can be held liable for damages caused by its subsidiary in the following exceptional cases.
Under Swiss law, it is possible in theory to hold shareholders and/or parent companies liable for climate change damages caused by the company or its subsidiary. However, the threshold is high and exceptional circumstances are necessary to pierce the corporate vail and disregard the liability shield between the company and its shareholders. Currently, there is no precedent regarding the liability of shareholders and/or parent companies with regard to climate change damages.
In the recent past, the Swiss legislature has imposed a number of new ESG reporting duties on Swiss companies, some of which also include a climate change component. The current ESG-reporting framework is set out below.
General ESG/Non-financial Reporting Obligation
The obligation to prepare a report on “non-financial matters” (ESG-Report) is modelled after the EU Directive on Non-Financial Reporting (Directive 2014/95). The aim of the ESG report is to provide information about the company’s environmental matters, in particular CO₂ targets, social matters, employee matters, respect for human rights and the fight against corruption. Specifically, the ESG report should cover the following (non-exhaustive) list of topics:
With regards to the climate change-related component of the ESG report, the Federal Council intends to introduce TCFD-based reporting requirements, which will be part of the general ESG report. For this purpose, the Federal Council has launched a new draft ordinance for consultation according to which the climate change-related ESG-reporting obligations are fulfilled if the ESG report follows the recommendations of the TCFD.
The scope of application of the ESG-report obligation is rather narrow. In a nutshell, it only applies to large, listed or FINMA-regulated (banks, securities firms, asset managers, etc) entities domiciled in Switzerland with (i) at least 500 full time employees on an annual average and (ii) total assets of at least CHF20 million or revenues of CHF40 million in two consecutive years. Entities that are controlled by an in-scope company or that are subject to equivalent reporting under foreign law are exempted from the ESG-reporting requirement.
The ESG-reporting obligation follows the “comply or explain” principle also known under EU law: if a company lacks policies on certain ESG topics, the ESG report must list justifiable reasons for the omission.
The ESG report may be based on national, European or international reporting standards, such as the OECD Guidelines for Multinational Enterprises or the standards of the Global Reporting Initiative (GRI). The report may be published in one of the Swiss national languages, or in English. It must be approved by the board of directors and the shareholders’ meeting and made electronically accessible to the public during a period of ten years. The ESG report is not subject to an audit requirement.
The ESG report-related provisions entered into force on 1 January 2022. The first reports will be due ahead of the 2024 annual shareholders’ meetings covering the financial year 2023.
Supply Chain-Related Due Diligence and Reporting Duties (Article 964j-964l, CO)
Further to the above-mentioned ESG-reporting obligations, some companies are required to take additional due diligence measures with corresponding reporting obligations regarding conflict minerals and child labour in their supply chain (supply chain due diligence).
Companies falling within the scope of application of the supply chain due diligence (see below) must maintain a management system, which includes:
Companies are further required to (i) identify and assess the risks of harmful impacts in their supply chain, (ii) draw up a risk management plan, and (iii) take measures to minimise the identified risks.
The supply chain due diligence obligations only apply to companies with registered seat, head office or principal place of business in Switzerland that either (i) circulate or process in Switzerland minerals containing “conflict minerals” (minerals or metals containing tin, tantalum, tungsten, or gold from conflict or high-risk areas); or (ii) offer products or services for which there is a reasonable suspicion regarding child labour. Furthermore, exemptions apply for small and medium-sized companies (regarding child labour-related duties) and companies with little exposure to conflict minerals (below a certain de minimis amount of minerals) or child labour (supplies from recognised low risk countries only).
The corresponding reporting on the new supply chain due diligence obligations is due for the first time for financial year 2023; ie, the report must be published within six months following the close of the 2023 financial year. The report has to be approved by the board of directors (but not by the annual general meeting) and is subject to an audit requirement as far as the conflict mineral-related due diligence obligations are concerned.
Additional Transparency Rules for Commodities Companies
An additional set of transparency rules apply for large, listed commodities companies. The transparency rules require in-scope companies to report on payments made to state bodies (in cash or kind) in excess of CHF100,000.
Since the scope of application only covers companies, which (either directly or through direct subsidiaries) are active in the field of either extraction of minerals, oil or natural gas or harvesting of timber in primary forests (under exclusion of trading in these commodities), the rules currently only apply to a handful of Swiss companies.
Until quite recently there was no separate work stream in a legal due diligence focusing on climate change risks. Rather, climate change-related risks formed part of the assessment of the target’s regulatory compliance (eg, adherence to the new due diligence and reporting duties, see 6.4 ESG Reporting and Climate Change) and the target’s potential exposure to claims.
However, climate change-related topics play an increasingly important role in the selection of potential targets and M&A in general and, in transactions where climate change-related topics are of particular importance given the target’s business operations, separate ESG due diligence work streams are no longer uncommon.
In property transactions, the legal assessment regarding the implementation of climate friendly investments (eg, new climate-friendly heating systems, photovoltaic systems, associations for self-consumption (Zusammenschluss zum Eigenverbrauch) where the residents of a building or buildings consume electricity that they have generated on site themselves, energy-oriented refurbishment, green labels, etc) has become increasingly relevant, in particular for investment properties in connection with the requirements under the applicable tenancy law or in greenfield projects.
With the revision of the Energy Act and its entry into force in 2018, Switzerland has taken various measures regarding renewable energies.
By ratifying the Paris Agreement, Switzerland has committed itself to the goal of aligning financial flows in a climate-friendly manner. There has, however, been no implementation of regulatory or policy instruments to date (July 2022).
After a climate compatibility test of the entire Swiss financial market in 2020, the Federal Council has issued a report on how Switzerland can align financial flows in a climate-compatible way. Based on this report, the Federal Council is currently evaluating the implementation of transparency measures (eg, to avoid greenwashing) through financial market legislation.
Consequences of the Responsible Business Initiative – New Reporting and Due Diligence Requirements for Swiss Companies
Even though the recent Responsible Business Initiative (Konzernverantwortungs-initiative), which was aimed, inter alia, at introducing a new vicarious liability regime for damage caused by controlled entities abroad (including environmental damage), failed to win the required majority and was thus rejected in a popular vote, the initiative forced the Swiss Parliament to present a counter-proposal that provides for significantly tighter rules on ESG due diligence and reporting. These new rules, of which some are already in force while others are still being implemented by the legislature (for example, with regard to climate reporting), should definitely be kept in mind by companies that are operating in Switzerland or plan to set up operations in Switzerland.
While the counter-proposal does not introduce new civil liability provisions for climate or other environmental damage caused by subsidiaries and economically controlled businesses abroad, Swiss companies would be well advised to implement new due diligence and reporting obligations carefully and promptly in order to avoid reputational and legal risks resulting from new duties of care imposed by the counter-proposal and that may lay ground for potential liability claims. A failure to implement the prescribed due diligence and reporting obligations may, under certain circumstances, expose a company or its corporate bodies to civil law claims.
The significant changes imposed by the counter-proposal in the area of ESG due diligence and reporting include extensive, new reporting obligations on non-financial matters, which also cover climate change-related topics. The latter shall be a focus of this article as the Swiss Federal Council has just published the implementing draft ordinance – in March 2022.
Non-financial reporting duties
The non-financial reporting obligations are modelled after the EU Directive on Non-Financial Reporting (Directive 2014/95). The aim is to provide investors and other stakeholders with adequate information about the company’s environmental matters, in particular concerning its CO₂ targets, social matters, employee matters, respect for human rights and the fight against corruption.
While the new reporting obligations are rather extensive and will require a considerable effort both to implement and to monitor, the relevant thresholds for Swiss companies to fall within the scope of application are set rather high.
Scope of application
The duty to issue an annual report on non-financial matters applies to large Swiss “public interest companies” only, which include:
Regarding the size of a “public interest company”, the following thresholds apply, which must be exceeded over the course of two consecutive business years (including controlled entities worldwide). The “public interest company” must have:
Exemptions apply for large Swiss “public interest companies” that are controlled either by an “in scope” company or by a company subject to equivalent reporting obligations under foreign law.
In addition to the traditional financial reporting obligations, “in-scope” companies will have to draft a report on non-financial matters, which has to be submitted to the Annual General Meeting for approval and then remain publicly available for ten years. The report shall include:
In substance, the report must generally cover the company’s environmental (regarding the climate change related matters, see the New climate change-related reporting in particular section directly below), social and employment-related matters, respect for human rights, and anti-corruption. If a company opts not to employ a diligence concept in one of the aforementioned ESG related areas, it must state the reasons therefor in the report in a clear, unambiguous and justifiable manner (“comply or explain” approach). The report must extend to controlled entities worldwide.
Public interest companies are free to follow national, European, or international standards (such as the OECD Guiding Principles). If such a standard is applied, it must be explicitly referenced in the report and must be complied with in its entirety. This would seem an obvious option for businesses that have already implemented reporting according to such a recognised standard. When applying such standards, Swiss law must nonetheless be complied with entirely, which may mean that a supplementary report must be drawn up, if necessary to ensure such compliance.
New climate change-related reporting in particular
With regards to the environmental and climate change-related component of the non-financial reporting, the Swiss Federal council has decided to set out the details of such reporting in a separate ordinance (Ordinance on Climate Reporting), which has been published on 30 March 2022 and sent out for consultation. The aim of the ordinance is to create a basis for climate reporting that follows uniform criteria and is therefore comparable. This should facilitate investors’ search for suitable companies and prevent greenwashing.
Instead of setting up new reporting standards, the Swiss Federal Council chose to take the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) as basis for the new reporting obligations. The TCFD was created by the Financial Stability Board to improve and increase reporting of climate-related financial information.
I – Scope of application
As mentioned, the reporting obligations regarding climate change-related topics are part of the general non-financial reporting. Hence, only companies falling within the scope of non-financial reporting are also required to issue a climate change-related report (see the Scope of application section above).
II – Content
According to the Ordinance on Climate Reporting, there is a presumption that reporting on climate-related matters is complied with if the reporting is based on the recommendations of the Task Force on Climate-Related Financial Disclosures. However, this presumption does not exclude that the reporting may also be based on other guidelines or standards. In these cases, however, the company must be able to provide evidence that the required reporting obligation is fulfilled in a different way.
The recommendations referenced in the Ordinance on Climate Reporting were issued by the TCFD under the title “Recommendations of the Task Force on Climate-Related Financial Disclosures”. They were supplemented in October 2021 by the annex “Implementing the Recommendations of the Task Force on Climate-Related Financial Disclosures” and the supporting document “Guidance on Metrics, Targets, and Transition Plans.” In order to benefit from the presumption of compliance, the climate reporting must be based on the recommendations of the TCFD as amended in June 2017 and the annex thereto as amended in October 2021.
The report shall cover all of the 11 recommendations of the TCFD in the following four thematic areas:
In addition, the reporting must take into account both the cross-sectoral “Guidance for All Sectors” and the sector-specific “Supplemental Guidance for Certain Sectors” for the 11 recommendations. In the sense of a “best efforts” undertaking, the implementation guidance (“Guidance on Metrics, Targets, and Transition Plans”; version of October 2021) should also be taken into account to the extent feasible and appropriate.
The climate-related reporting obligations follow the same “comply or explain” approach as the non-financial reporting obligations. If certain areas of climate reporting are left out, such omission must be clearly explained and justified in the report.
The Board of Directors approves and signs the report on non-financial matters (including the reporting on climate matters) and submits it to the Annual General Meeting (or any other body responsible for approving the annual financial statements) for approval. An external audit is currently not required by law.
Given the novelty of the new legislation, best practice is yet to evolve. Some companies have introduced one or more committees that deal with the reporting on non-financial matters and/or engage an external firm to audit the reports on a voluntary basis, in particular in light of the criminal sanctions for providing false information in the report or for failure to comply with the reporting obligations. Specifically, the individual persons involved in the reporting on non-financial matters may be sanctioned with fines of up to CHF50,000 (for negligence) and up to CHF100,000 (for intent) for providing false information in the report or failing to comply with the reporting obligations.
Entry into force and sanctions
While the general provisions on non-financial reporting have already entered into force (on 1 January 2022), the Ordinance on Climate Reporting is expected to enter into force on 1 January 2023. In either case, the report on non-financial matters (including the requirements according to the Ordinance on Climate Reporting) will be applicable for the financial year 2023 for the first time; ie, the report will have to be published ahead of 2024 Annual General Meeting.
Further to the new reporting obligations on non-financial matters, the Responsible Business Initiative has paved the way for strict due diligence obligations with respect to child labour and conflict minerals, which will also be applicable for the financial year 2023 for the first time.
In contrast to the reporting obligation on non-financial matters, the new due diligence obligations in the area of conflict minerals and child labour do not only apply to major listed companies and regulated financial entities. In principle, they apply to each company domiciled in Switzerland whose operations may potentially come in touch with conflict minerals or child labour by either (i) importing conflict minerals or processing them in Switzerland, or (ii) offering products or services for which there are reasonable grounds to suspect that they have been produced or provided by children. Exemptions apply for small and medium-sized and low-risk companies.
With several ESG-related changes that have just come into force or will shortly come into force (on a federal but also on cantonal level), companies are well advised to clarify in depth whether the new obligations apply to them and how they intend to implement them. If applicable, companies need to start implementing the new obligations now at the latest in order to be prepared for financial year 2023. Even companies that are not currently in scope will need to keep an eye on the new regulatory obligations and consider implementing them, at least in part, voluntarily to increase their attractiveness to investors and lenders.