Illustration of the new non-financial reporting requirements for Swiss companies

1. Overview

The Swiss Parliament enacted new reporting, transparency, and due diligence obligations, which came into force in 2022. Art. 964a-c of the Swiss Code of Obligations (CO) relate to reporting obligations for environmental, social, and governance (ESG) matters for large Swiss public interest entities (PIEs)¹, and apply from calendar year 2023 with reporting requirement in 2024. To ensure future consistency and comparability of this reporting, companies are encouraged to apply the disclosure requirements of the Task Force on Climate-related Financial Disclosures (TCFD) for their reporting on environmental matters from calendar year 2024 onwards.

New sustainability reporting requirements in the European Union (EU) have significant extraterritorial reach and are set to fundamentally change the reporting landscape. In November 2022, the European Council and the European Parliament approved the final text of the Corporate Sustainability Reporting Directive (CSRD), which will require sustainability reporting and assurance far beyond what most companies provide today and are more extensive than the CO reporting requirements. The CSRD captures all companies with significant operations in the EU, including non-listed Swiss companies with as few as one subsidiary or branch in the EU. The requirements become effective in stages with earliest application from 1 January 2024 to 1 January 2028.

Furthermore, the IFRS Foundation’s International Sustainability Standards Board (ISSB) is responsible for developing IFRS Sustainability Disclosure Standards that provide a global baseline of sustainability disclosures. The ISSB has international political support, and is backed by the G7, the G20, the International Organization of Securities Commissions (IOSCO), the Financial Stability Board, Finance Ministers, and Central Bank Governors from more than 40 jurisdictions. The adoption in Switzerland depends on whether the ISSB Standards are mandated by the local laws and regulations.

The U.S. Securities and Exchange Commission (SEC) has also proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks, and certain climate-related financial statement metrics in a note of the audited financial statements.

It may be a challenge for Swiss companies to identify which regulations will apply and when these will apply. This publication describes the emerging landscape for standardised sustainability reporting and provides examples of which reporting regulations may apply to Swiss companies and when these are applicable. These examples focus on the EU’s CSRD and the CO, which are more likely to significantly affect Swiss companies.

2. Examples of companies that may fall under the EU’s CSRD and the CO

ALPHA is an unlisted multinational company (ALPHA Group) with worldwide operations². The ultimate parent is incorporated in Switzerland. In the two most recent reporting periods, ALPHA Group had:

• EUR 400m balance sheet total
• EUR 600m sales revenue/net turnover³ with EUR 200m generated in the EU
• 1000 employees

The Group has three wholly owned unlisted subsidiaries that are registered and operating in the EU, and which consolidate into the Swiss Group under IFRS. In the most recent reporting period, each of the distinct EU subsidiaries had:

• less than EUR 20m balance sheet total
• less than EUR 40m sales revenue/net turnover
• less than 250 employees

ALPHA Group is registered in Switzerland, however, it is not in scope of Art. 964a-c CO because it is not a PIE. ALPHA Group does not have to provide a non-financial report under CO.

ALPHA Group and its subsidiaries are not listed on an EU-regulated market and the EU subsidiaries do not meet any of the three criteria to quality as a ‘large EU undertaking’⁴. Therefore, ALPHA Group is only in scope of the CSRD from 1 January 2028 because the Group generated a net turnover in the EU of more than EUR 150m in each of the last two financial years.

The final text of the CSRD requires that the sustainability report provides information at the Group level of the non-EU ultimate parent. This brings the whole of the Swiss parent and its worldwide operations within the scope of the CSRD from 1 January 2028. The EU subsidiary of the Swiss undertaking will be responsible for publishing the sustainability information⁵.

In this modified scenario, ALPHA Group is listed on Paris Euronext. Therefore, the Group is in scope of Art. 964a-c CO from 1 January 2023 because it is a Swiss PIE and fulfils the size criteria. The Group shall prepare a report on non-financial matters in accordance with the CO.

ALPHA Group is in scope of the CSRD from 1 January 2024 because ALPHA Group is listed on an EU-regulated market and has more than 500 employees.

The CSRD requires that the sustainability report provides information at the group level. This brings the whole of the non-EU parent and its worldwide operations within the scope of the CSRD from 1 January 2024. The information required in these sustainability reports should be prepared in accordance with European Sustainability Reporting Standards (ESRS) or standards deemed as equivalent.

It is possible that EFRAG regulation might be considered equivalent to the requirements of CO, as this was largely based on the Non-financial Reporting Directive (NFRD), the predecessor of the CSRD. If EFRAG`s ESRS would be considered equivalent in Switzerland, the company could report under ESRS only.

In this modified scenario, one of the EU unlisted subsidiaries meets two of the three criteria to be considered an ‘EU large undertaking’ and would therefore be in scope of the CSRD from 1 January 2025⁶. ALPHA Group is in scope of the CSRD from 1 January 2028 because the Group generated a net turnover in the EU of more than EUR 150m in each of the last two financial years (same as for scenario 2.1). For the purposes of CO, ALPHA Group is not a PIE and does not have to provide a non-financial report under CO.

Transitional provision: the CSRD contains a transitional provision that would exempt the EU non-PIE subsidiary from preparing separate subsidiary sustainability reporting for seven years if the subsidiary is included in a “consolidated sustainability report” of another EU subsidiary of the same ultimate non-EU parent⁷.

ALPHA Group does not have an EU intermediate parent preparing consolidated reporting at the EU level that would permit the exemption. However, it might be possible for ALPHA to voluntarily prepare Group consolidated sustainability reporting from 1 January 2025 so that the exemption is available to the EU large subsidiary. In this scenario, there are two key considerations:

• The Group consolidated sustainability information is required to be prepared in accordance with the ESRS or standards deemed as equivalent. What may be deemed ‘equivalent’ is yet to be determined by the EC. ALPHA Group may prepare the consolidated sustainability reporting using a framework other than ESRS. In practice, this means it is uncertain whether Group consolidated reporting prepared on a basis other than the ESRS would be accepted as equivalent and would permit an EU subsidiary exemption from 2025 onwards.
• The Group’s early-adoption of the CSRD sustainability reporting requirements would bring ALPHA’s worldwide operations within scope from 1 January 2025, which is three years earlier than the mandatory requirement for non-EU undertakings from 1 January 2028. The potentially onerous and costly exercise of producing consolidated sustainability reporting for worldwide operations three years earlier than required to make the exemption available to the EU large subsidiary may not be feasible for ALPHA Group.

In this scenario, two of the three EU subsidiaries consolidate into the third EU subsidiary, and the resulting EU group meets two of the three criteria to be considered an ‘EU large group’⁸. The EU large group is in scope of the CSRD from 1 January 2025. If one of the consolidating EU subsidiaries meets the criteria to be considered an EU large undertaking (such as in example 2.3) then this EU subsidiary could apply the transitional provision exemption from preparing standalone sustainability reporting, since it is now included in the consolidated sustainability report of another EU subsidiary of the same ultimate non-EU parent.

3. ISSB Standards and SEC disclosure rule

ALPHA Group will be in scope of the ISSB Standards only if these are adopted into Switzerland’s local laws and regulations, or if the Group has a listing in an overseas jurisdiction that has mandated the ISSB Standards. The three unlisted EU subsidiaries may also individually come in scope of the ISSB Standards if these are adopted into the respective EU country laws and regulations where the subsidiaries are registered. The ISSB’s effective date for IFRS S1 and IFRS S2 is 1 January 2024, however, local regulators may choose a different effective date.

ALPHA Group and its subsidiaries are not in scope of the SEC climate disclosure rules in their current form because none of the companies are listed on a US-regulated market. The effective date for the SEC climate-disclosure rule has not yet been announced.

4. Interaction between the regulatory frameworks

There are differences between the sustainability standards proposed by EFRAG, ISSB and SEC.

Stakeholders: Some of these regulations have a different audience. The ISSB and SEC regulations are designed to meet the needs of investors. However, the EFRAG regulations take a wider stakeholder lens and are designed to meet the needs of more than just investors.

Materiality: One of the implications of having a different audience is that there is a different definition of materiality, and this may be a particular challenge when it comes to practical applications. The ISSB Standards use the same definition of materiality as exists for the IFRS accounting standards. Similarly, the SEC rule proposes to use its definition of financial materiality for sustainability reporting. However, EFRAG proposes the concept of double materiality, which includes financial and impact materiality. A company must report on how its business is affected by sustainability related matters and how their activities impact society and the environment.

Approach to standard-setting: The ISSB Standards are principles-based and high-level. In contrast, the ESRS require extensive detailed disclosures and data points.

Scope: we expect the application of the respective regulations in Switzerland to play out as follows.

• EFRAG: The scope of the ESRS is defined in the CSRD. EU countries have 18-months to transpose the CSRD into their local laws and regulations. The challenge for Swiss companies is that the CSRD has significant extraterritorial reach. As such, we can expect that certain Swiss companies will be required to report in accordance with the ESRS.
• ISSB: The applicability of the ISSB depends on whether these standards are adopted into local laws and regulations. For example, if the ISSB Standards become a requirement of the UK securities regulator, then Swiss companies with a listing in the UK could be in scope.
• SEC: Only Swiss companies that are US-listed public companies are in scope.

^{Footnotes: 1) Art. 2 lit. c Audit Oversight Act defines PIEs as (a) publicly traded companies, i. e. companies (i) whose equity securities are listed on a stock exchange; (ii) that have bonds outstanding; or (iii) that contribute at least 20% of assets or revenues to the consolidated accounts of a company under (i) or (ii), and (b) regulated entities supervised by the Swiss Financial Market Supervisory Authority FINMA, such as banks or insurance companies. 2) The diagram is simplified to show only the Swiss parent and EU subsidiaries and exclude other worldwide operations. 3) “Net turnover” means the amounts derived from the sale of products and the provision of services after deducting sales rebates, value added tax and other taxes directly linked to turnover. The definition is modified for insurance} undertakings, credit institutions and undertakings in scope of Article 40a (1) of the CSRD. 4) “Large” EU undertakings (whether listed or not and including subsidiaries of non-EU parents) are those that meet two of the following criteria: more than EUR 20m total assets; more than  EUR 40m net turnover; more than 250 employees.  5) The EU subsidiary preparing this consolidated sustainability report must be one of the EU subsidiaries that generated the greatest turnover in the EU in at least one of the preceding five financial years, on a consolidated basis where applicable. Such a consolidated sustainability report would  be required to include all EU subsidiaries of the non-EU parent that are in scope of the CSRD. 6) ^{For example, assume that EU Subsidiary 1 had EUR 30m total assets and 400 employees in the  most recent financial reporting period. This EU subsidiary will be in scope of the CSRD from 1 January 2025 and will be required to publish EU subsidiary sustainability reporting.} 7) See fn. 5. 8) ^{Whether such undertakings are large is determined by reference to the same thresholds for large EU  undertakings, with the criterion for net turnover adapted for such undertakings}