New ESG disclosure and due diligence rules

On 1 January 2022, the indirect counterproposal to the so-called
Responsible Business Initiative has been introduced in the Swiss
Code of Obligations (CO). The new rules in articles 964a ff. CO
require that companies of public interest domiciled in Switzerland,
such as listed companies and large companies supervised by the
Swiss Financial Market Supervisory Authority (FINMA), publish
annual reports on ESG issues. Companies must account for
environmental, social and employee issues, respect for human rights
and the fight against corruption in their report. The new reporting
requirement under Swiss law corresponds to the EU Directive
2014/95/EU on reporting on non-financial aspects. The report on ESG
matters must be approved by the board of directors and the
shareholders’ meeting. Further, the report must be published
electronically and remain available for at least ten years.

In addition to the reporting obligations on non-financial
matters, new due diligence and reporting obligations have been
introduced for all companies with their registered office, head
office or principal place of business in Switzerland that i) import
or process tin, tantalum, tungsten or gold containing minerals or
metals from conflict or high-risk areas (conflict minerals) or that
ii) offer products or services for which there is reasonable
suspicion that they were manufactured or provided using child
labour (article 964j ff. CO). Thus, the new due diligence and
reporting obligations in the area of conflict minerals and child
labour apply, in principle, to every company domiciled in
Switzerland. Companies in the scope of the rules must comply with
due diligence requirements in their supply chain (which includes
controlled entities within their own group of companies) and
report thereon. While only the report on conflict minerals must be
audited, both the report on conflict minerals and/or child labour
must be approved by the board of directors. The report must be
published electronically and remain available for at least ten
years. Details on the due diligence and reporting obligations
regarding conflict minerals and child labour are governed in an
ordinance.

Companies will have to comply with the new disclosure and due
diligence rules as of January 2023 and companies whose financial
year corresponds to the calendar year will have to publish their
first reports in 2024 (for the 2023 financial year.).

Special transparency rules for commodity companies

Further, independently from the ESG disclosure rules mentioned
above, new ESG-related transparency rules for certain commodity
companies have entered into force in 2021 (new articles 964d to
964f CO). Companies that, directly or indirectly through a
controlled entity, extract minerals, oils, natural gas or primary
forest wood and which are subject to an ordinary audit, ie meet
applicable thresholds (listed companies, companies exceeding two of
the following thresholds in two consecutive financial years: i) a
total of CHF20m in assets, ii) CHF40m turnover, iii) 250 FTEs on
annual average, as well as companies that are required to prepare
consolidated accounts) have to publish a special report with
respect to certain payments (in cash or in kind) of an aggregate
amount of CHF100,000 or more to governmental authorities.

Such special reports will have to be published regarding
financial years that have started on 1 January 2022 or later.

Criminal law provisions

We believe that the new regulations can provide a valuable
business opportunity and contribute to a more sustainable economy.
However, a violation of the new ESG rules may not only result in
civil liability and reputational damage for the company, but such
violation is also subject to criminal penalties. As of January of
this year, two new criminal offences have been entered into force
in the Swiss Criminal Code (CC).

According to article 325bis CC a person who i) provides false
information in the report on payments to governmental authorities
or wholly or partly fails to make such report or who ii) fails to
comply with the obligation to retain such reports for a ten-year
period is liable to a fine of up to CHF10,000.

Article 325ter CC provides that a person shall be liable to a
fine not exceeding CHF100,000 if he or she willfully commits any of
the following acts: i) providing false information in the reports
on non-financial matters, conflict minerals or child labour,
failure to make such required reports or ii) failure to approve and
retain such reports as required by law. If a person acted
negligently, she/he shall be liable to a fine not exceeding
CHF50,000.

Based on a referral rule in Swiss criminal law, which attributes
criminal liability to the members of the board of directors and
management if a special obligation that is incumbent on the legal
entity is violated (article 29 CC), the persons who are responsible
for compliance with the ESG due diligence and reporting rules are
criminally liable for violations of articles 325bis and 325ter CC.
While Swiss criminal law also knows the concept of corporate
criminal liability (article 102 CC), a legal entity cannot be
fined for violations of articles 325bis and 325ter CC, as the
corporate criminal liability does not apply for contraventions
punishable by fines.

In principle, anyone can file a criminal complaint for a
violation of articles 325bis and 325ter CC. The cantonal criminal
authorities are responsible for prosecuting the offences.

How to mitigate the risk of criminal liability

In addition to reputational damage, a conviction for a violation
of article 325bis or 325ter CC may represent a possible basis for
civil liability against a company and its management. Furthermore,
a conviction for a violation of article 325bis or 325ter CC may
lead to an entry in the criminal record of the natural person
concerned and, for regulated companies, there may also be reporting
obligations to supervisory authorities and potential concerns with
fit and proper requirements for board members and executives in
Switzerland and abroad.

Therefore, companies must first and foremost ensure that they
comply with the new ESG rules and thus minimise the risk of
criminal liability for their management.

Generally, companies must establish and document a sound control
framework and reporting process. It is preferable to involve
external experts for this process, especially if no proven
specialists are employed by the company. All newly established
procedures and requirements must be sufficiently documented and
discussed by the governing bodies of the company, including the
board of directors.

Even if no external audit is required for the report on
non-financial matters and on child labour (in contrast to the
report on conflict minerals, article 16 of the corresponding
ordinance), companies should consider providing for a voluntary
audit. In particular, for a negligent act to be punishable, it is
necessary that the offender, eg, a member of the board of
directors, did not realise that he or she may have published a
false report, but that he or she could have realised this if he or
she had exercised due diligence. Through a voluntary audit, the
governing bodies of a company can demonstrate that they acted
diligently. According to current available information, some
companies subject to the reporting obligations are considering
having their report on non-financial matters voluntarily audited to
some extent.

Finally, in our opinion, a certain materiality threshold should
apply regarding false information in a report. A criminal
conviction can only be justified if false information in the report
can lead to the reader of the report being given a misleading
impression. It is therefore particularly important that all
responsible persons are aligned with the key statements of any
report and confirm them. In addition, while it must be possible for
companies to maintain business secrets in their reports, companies
should ensure a transparent communication in that regard.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.