Due diligence and reporting obligations on non-financial matters, conflict minerals and child labour

11.01.2024 / Kunz Niklaus, De Nando Massimiliano

As of 1 January 2024, the Ordinance on Reporting on Climate Matters came into force, which contains guidelines on how reporting on non-financial matters in the area of climate matters is to be implemented. This ordinance supplements the provisions newly introduced into the Swiss Code of Obligations ("CO") with regard to due diligence and reporting obligations on non-financial matters (article 964a-c CO) and on conflict minerals and child labour (article 964j-l CO), which already came into force on 1 January 2022 and must be implemented by the companies concerned since the financial year 2023.

Companies that fall within the scope of the due diligence and reporting obligations on non-financial matters, conflict minerals and child labour are obliged to prepare a report on these topics for the financial year 2023. This report must be published in 2024. This article serves as an overview in view of the upcoming Annual General Meeting season and is intended to highlight the key points of the newly introduced duties.
 

Reporting on non-financial matters


Scope of application
The supreme governing or administrative body of the companies concerned must prepare an annual report on non-financial matters and have it approved by the Annual General Meeting ("AGM").

The non-financial reporting obligations apply to companies of public interest. This includes companies having their shares listed on a stock exchange, having bonds outstanding, or which require a license, recognition, authorization or registration from the Swiss Financial Market Supervisory Authority FINMA as a bank, insurance company or other financial service provider. Provided that these companies must (together with all Swiss or foreign companies controlled by them) in two consecutive business years (i) have an annual average of at least 500 full-time employees and (ii) exceed at least one of the following two thresholds: balance sheet total of CHF 20 million or revenues of CHF 40 million.

However, companies that are controlled by another company, which in turn must prepare a report on non-financial matters in accordance with Swiss law or an equivalent report in accordance with foreign law, are exempt. Such companies are not required to prepare a supplementary report.

Subject of the reporting obligations
The reporting obligation extends to the so-called ESG areas (Environmental, Social, Governance), namely environmental matters, in particular CO2 targets, social matters, labour matters, human rights and anti-corruption.

The report must contain the information required to understand the company's business performance, results, position and the impact of its activities on non-financial matters. The company must define concepts with regard to the implementation of the matters defined by law and describe in its report the concepts pursued (including the due diligence applied) and the implementation of these concepts, as well as the risks it has identified in these matters and how it manages these risks. Finally, the company must define and the report must provide the performance indicators for these matters.

If a company does not pursue a concept with regard to one of the aforementioned matters, it must provide a clear and reasoned explanation in the report. The comply or explain approach is intended to allow investors and consumers to assess the credibility of the explanation of the company. In turn, this should lead to peer pressure on the companies concerned, as they have an interest in complying with their obligations so that investors and consumers do not turn away from them.

A company may base its report on non-financial matters on national, European or international regulations, whereby the regulations applied must be mentioned in the report. However, the application of these regulations does not release the company from complying with all the requirements of article 964b CO. If the regulations do not fulfil all of the requirements of article 964b CO, a supplementary report must be drawn up. The following guidelines and standards may be used: the guidelines of the Organisation for Economic Co-operation and Development ("OECD"), the standards of the Global Reporting Initiative ("GRI"), the UN Principles of Responsible Investment ("PRI"), the UN Global Compact, ISO 26000 Social Responsibility and the Sustainability Accounting Standards Board Standards ("SASB Standards") (see report of the Federal Office of Justice on the indirect counter-proposal of Parliament dated 19 November 2019, p. 15 f.).

However, the Swiss law does not provide more detailed information on how the report should be structured. Only with regard to reporting on climate-related matters, the Swiss Federal Council has specified the reporting obligations based on the recommendations of the Task Force on Climate-related Financial Disclosures ("TCFD"). The Ordinance on Reporting on Climate-related Financial Disclosures establishes the presumption that the reporting obligation is fulfilled if it is based on the recommendations of the TCFD. However, a company can also base its reporting on climate-related matters on other guidelines or standards, in which case evidence must be provided that the required reporting obligation has been met.

The report on climate matters must be integrated into the report on non-financial matters and published with it.

Formalities
The report must be drawn up and signed by the supreme governing or administrative body of the company (in Swiss stock corporations the board of directors) in a Swiss national language or in English and submitted to the AGM for approval. The AGM can only approve or reject the report, but has no authority to amend it. There is no obligation to have the report audited by an independent supervisory body (e.g. auditors). If the report is approved, it must be published electronically on the company's website and must be publicly accessible for ten years.

Some legal scholars have taken the view that if the AGM refuses to approve the report on non-financial reporting, the supreme governing or administrative body must only request a second approval from the AGM if the report is obviously incomplete or incorrect with regard to the factual circumstances presented (see Oser David/Mattle Karin, in: Watter/Vogt [Hrsg.], Basler Kommentar, Obligationenrecht II, 6. Aufl., Basel 2023, Art. 964c N 5 f.). Certain legal scholars even assume that obtaining the approval of the AGM constitutes a purely consultative vote (see Böckli Peter, Schweizer Aktienrecht, 5. Aufl., Zürich 2022, § 6 N 714 and Bühler Christoph, Nichtfinanzielle Berichterstattung nach dem Gegenvorschlag zur Konzernverantwortungsinitiative und ihre Bedeutung für den Finanzsektor, SZW 2021, S. 716–725, 723). In our opinion, neither the one nor the other view can be followed. Firstly, the wording of article 964c para. 1 CO expressly states that the report on non-financial matters requires the approval of the body responsible for approving the annual financial statements. In contrast to the vote on prospective variable remuneration, for example, where the law states that the remuneration report is submitted to the AGM for a consultative vote (see article 735 para. 3 no. 4 CO), article 964c CO does not state that the vote should not be binding, but expressly refers to approval by the AGM. The report of the Federal Office of Justice on Parliament's indirect counter-proposal of 19 November 2019 also states that the report must be approved annually by the general meeting and that the approval of the non-financial report falls within the competence of the AGM (see report of the Federal Office of Justice on Parliament's indirect counter-proposal of 19 November 2019, p. 16 f.). We therefore are of the opinion that the resolution of the AGM is binding and that the supreme governing or administrative body must request a second approval, if the AGM refuses to approve the report.
 

Conflict minerals and child labour


Scope of application
Companies whose registered office, head office or principal place of business is located in Switzerland must comply with due diligence obligations in the supply chain and report on this if they:

  • transfer tin, tantalum, tungsten or gold (so-called 3TG minerals) in a certain minimum quantity from conflict and high-risk areas into free circulation in Switzerland or process them in Switzerland; or
  • offer products or services that are reasonably suspected of being manufactured or provided using child labour.

The Swiss Federal Council has set out definitions, exceptions and restrictions regarding small and medium-sized enterprises ("SMEs") and minimum import volumes in the Federal Council Ordinance on Due Diligence and Transparency in relation to Minerals and Metals from Conflict-Affected Areas and Child Labour ("DDTrO"). These exceptions are strongly orientated towards the size of the company with regard to reporting obligations on non-financial matters. Therfore, SMEs that do not have to comply with the obligations are companies that, together with the domestic and foreign companies they control, fall below two of the following sizes in two consecutive financial years: a) a balance sheet total of CHF 20 million; b) sales revenue of CHF 40 million and c) 250 full-time employees on an annual average.

In addition, there is an exemption from the due diligence and reporting obligations under Swiss law if a company complies with an internationally recognised and equivalent set of rules. Regulations that fulfil these requirements are defined by the Federal Council and are listed in Annex 2, Parts A and B of the DDTrO.

Conflict minerals
Companies concerned that import or process 3TG minerals in Switzerland must check whether these originate from conflict and high-risk areas and whether the statutory import and processing quantities are exceeded. The Federal Council determines the annual import and processing quantities for conflict minerals up to which a company is exempt from the due diligence and reporting obligations. These are listed in Annex 1 to the DDTrO.

If the statutory minimum quantities are not exceeded and the materials do not originate from a conflict or high-risk area, a company is exempt from the reporting obligation. 

Child labour
Regarding child labour, SMEs and low-risk companies are exempt from the due diligence and reporting obligations, provided that the products or services offered have not obviously been manufactured or provided using child labour. The assumption of obviousness requires (certain) knowledge of the use of unlawful child labour; a (justified) suspicion is therefore not sufficient. Furthermore, a company is not obliged to conduct an audit and does not have to actively investigate child labour from reliable, objective and independent sources (e.g. from legally binding, public court decisions, reports of the International Labour Organization or reports of companies subject to the due diligence obligations of this Ordinance and in which the use of child labour for certain products or services has been explicitly identified).

Low-risk companies are companies that source and manufacture their products or provide their services primarily from countries that are classified as "basic" in Unicef's Children's Rights in the Workplace Index.

If none of the above exceptions apply, a company must assess whether there is a reasonable suspicion of child labour and, if there is a reasonable suspicion, prepare a report.

Subject of the due diligence and reporting obligations
The due diligence obligations include in particular:

  • affected companies must maintain a management system with regard to their supply chain policy. The company must define its supply chain policy and a supply chain traceability system for minerals and metals that may originate from conflict-affected and high-risk areas and for products or services for which there are reasonable grounds to suspect child labour;
  • In addition, a risk management plan must be drawn up that describes the methods used by a company to identify, analyse and prioritise the risks of harmful effects of business activities in the supply chain. It must describe the approach to risk minimisation and important milestones relating to the implementation of the measures taken.

As with reporting on non-financial matters, companies must also report on how they implement due diligence obligations in the areas of conflict minerals and child labour.

Formalities
The report on the fulfilment of due diligence obligations must be drawn up and signed by the supreme governing or administrative body of the company in a Swiss national language or in English. The supreme governing or administrative body shall ensure that the report is published electronically on the company's website within six months of the end of the financial year and remains publicly accessible for at least ten years.

The report does not have to be submitted to the AGM for approval. In contrast to reporting on children labour, compliance with due diligence obligations regarding conflict minerals must also be audited by an independent expert, namely an authorised audit expert. 
 

Criminal and civil liability for breach of due diligence and reporting obligations


Non-compliance with the reporting obligation can result in both civil and criminal law consequences.

In terms of criminal law, article 325ter of the Swiss Criminal Code ("SSC") must be observed, according to which anyone who fails to report on non-financial matters, makes false statements in the reports or fails to comply with the legal obligation to retain and document information may be criminally sanctioned with a fine of up to CHF 100,000 for deliberate or up to CHF 50,000 for negligent breach of the reporting obligations. The company itself cannot be criminally sanctioned.

However, there is no criminal sanction for a breach of due diligence obligations regarding conflict minerals and child labour.

From a civil law point of view, negligent corporate bodies can be held liable if the breach of due diligence and reporting obligations leads to a damage.
 

Conclusion


The fulfilment of reporting obligations requires preparation that should not be underestimated, which is why it is recommended to start preparing the relevant reports in good time so that they can be approved and published on time.

Feel free to contact us, if you have any questions

Disclaimer

The information contained in this letter is for general information purposes and does not constitute legal or tax advice. In specific individual cases, the present content cannot replace individual advice from expert persons.

© Wenger Vieli Ltd., 2024