On 29 November 2020, the “Responsible Business Initiative” was rejected in a popular vote. Therefore, the indirect counterproposal will come into force, triggering new non-financial reporting and due diligence requirements. This article reflects the situation at the time of writing, which may change depending on future developments.
Requirements introduced by the counterproposal
The non-financial reporting requirements affect Public Interest Entities (PIEs; listed and FINMA regulated entities) if they fulfil the quantitative criteria as indicated in the left column in the table below. The entities in scope will have to report on specific non-financial topics by following a “comply or explain” approach. The non-financial reporting requirements largely reflect the European Union’s (EU) current Non-Financial Reporting Directive (NFRD), in force since 2017.
The counterproposal also introduces due diligence requirements for companies (regardless of size and listing) with headquarters, central administration or main establishment in Switzerland (right column in the table below). Companies affected are those importing to or processing in Switzerland four defined types of minerals or metals (tin, tantalum, tungsten or gold) from conflict or high-risk areas as well as the ones offering products or services where there is reasonable cause for concern of child labour. The affected entities will have to operate a risk management system along their value chain and report on their fulfilment of the due diligence requirements on an annual basis. Additionally, the due diligence requirements on minerals and metals will be subject to an annual review by an independent third party.
Implications of the due diligence requirements
The degree to which companies are affected will depend on the extent to which their value and supply chain encompass subsidiaries and third parties in high-risk areas. Complex value chains are typically expected in industries such as minerals, metals or agri-business where various tiers of suppliers in-between the source and the buyers in Switzerland could affect the supply chain transparency. A company importing any of those minerals must be able to assess if it was originally sourced from a conflict or high-risk area. Similar challenges will also apply to companies when assessing potential risks of child labour.
Early assessment recommended to ensure compliance
Forward looking, an early and detailed assessment of the current reporting and risks along the value chain is recommended. The counterproposal is likely to be applicable from 2022 onwards, leaving only a modest timeframe to close potential gaps. Will the non-financial reporting requirements be applicable? Where do the products or materials originally come from? How were the goods produced or minerals sourced? Who else was involved in the supply chain? What are the possible negative impacts or adverse effects in the supply chain?
Ensuing this assessment, affected companies will have to define or amend their reporting and supply chain policies and ensure products’ traceability. Additionally, companies should develop a plan to address and reduce the risks and adverse effects identified in their supply chain.
Overall, it is also an opportunity to review the entire risk and compliance management system regarding coverage of supply chain related risks – even beyond conflict minerals and child labour. The requirements will also undeniably affect several functions within a company such as risk and compliance management and communication. The involvement of the Board of Directors and C-levels combined with an early assessment of the current state and expectations of key stakeholders (internal and external) is essential. Not only are governance and oversight generally important in a business environment facing increasing regulations, they are also vital to meet the rising stakeholder’s expectations.
Outlook
Some open questions remain as of today. How are conflict areas, high-risk areas and reasonable grounds for suspicion of child labour defined? Will reporting on due diligence be made an integral part of existing non-financial reporting? Will due diligence on child labour also require an external review? To which extent will SMEs and companies with low-risk profiles be exempted from the requirements? The Federal Council will provide additional guidance in a new set of ordinances regarding these questions. Currently, companies at the European level are also facing increasing regulations in reporting and managing risk along their supply chains . These regulatory developments may not only influence the Swiss regulator but can also serve as a reference point for applying a broader scope on non-financial reporting, risk and compliance management than explicitly required by the counterproposal.
