ESG in Switzerland: Schellenberg Wittmer Q&A

In the last two years, how has the ESG practice group grown at the firm?

Anya George: One notable characteristic of our group now is that it is truly multidisciplinary. We possess expertise in both transactional matters and disputes. In recent years, we have placed increased emphasis on financial market regulation, greenwashing, and carbon credits—areas where many of our competitors lack expertise. In Switzerland, there has been a noticeable rise in requests for advice on ESG matters across the board, although understanding due diligence and reporting requirements remains a primary concern for our clients.

Christoph Vonlanthen: Swiss companies, whether listed or not, are now required to conduct due diligence regarding child labour and conflict minerals/metals (3TG). This new obligation has captured the attention of all in-scope companies as they must not only comply with due diligence duties but also meet reporting requirements, with potential criminal sanctions for non-compliance. Recently, we have been heavily involved in advising companies on structuring their due diligence processes, ensuring traceability for child labour and 3TG, and compiling the necessary disclosure. Disclosure requirements in Switzerland are distinct because they include incremental child labour considerations.

Our practice has significantly expanded as a result, with our work on this topic influencing all aspects of our services. For example, in our M&A group, we now assess a company’s due diligence and reporting practices when preparing it for sale.

What trends have you noticed within ESG disputes in the last year? What are your predictions for the next 12 months?

Anya George: As a Swiss lawyer, I have to mention the decision of the European Court of Human Rights in the KlimaSeniorinnen Schweiz (Swiss Climate Grannies) case, which was a landmark ruling when it comes to government climate policy. I believe that there will be an uptick in such cases following this decision.

There has been a clear increase in strategic climate cases against companies, mainly for greenwashing. While this trend is perhaps more noticeable outside of Switzerland, it is also emerging within Switzerland. Actions against directors have also significantly developed over the past year.

Environmental litigation remains a primary concern for clients – it is still identified as the top risk by general counsel and chief executives in surveys.

Social and employment disputes are also likely to increase due to the general economic situation, with employment matters becoming a significant issue in certain jurisdictions. Additionally, ESG backlash litigation is a notable new trend, particularly in the United States.

There are cases against companies and directors for applying ESG considerations, alleging that ESG considerations were applied to the detriment of shareholders’ interests. Overall, I anticipate a significant increase in the volume and complexity of cases across all elements of ESG.

What have been the changes in human rights legislation that businesses working in Switzerland need to be aware of?

Anya George: The legislation implementing the counter-proposal to the Responsible Business Initiative came into force on 1 January 2022. This introduced non-financial reporting duties for large public interest companies and due diligence reporting obligations for companies dealing with conflict minerals or child labour risks. These requirements apply from the financial year 2023, so the first reports are being submitted and published this year. As Christoph mentioned, this legislation has been a key focus for our clients this year.

Businesses in Switzerland also need to be aware of EU legislation, which often affects them. They should understand whether the CSRD or CS3D applies to them and what this means. Additionally, the EU’s forced labour regulation, currently in the legislative process, is important for them to follow. These regulations are related to human rights and broader ESG concerns and are crucial for Swiss businesses to know about.

Christoph Vonlanthen: In broad terms, publicly traded companies are typically up-to-date with legislative developments and have been publishing non-financial disclosures for years. If not required in Switzerland, they were required elsewhere in Europe or, to a lesser extent, by US regulation or were reported upon voluntarily.

Interestingly, the Swiss government is now considering expanding non-financial disclosure requirements to non-publicly traded companies.

This reflects a broader trend in Switzerland from reporting and disclosure requirements applicable only to publicly traded companies to including a broader range of companies. This is a major cultural shift for companies that never had to publish anything publicly. Now, they must post their first due diligence reports on child labour and 3TG, many of which were due by 30 June. This new requirement demands significant preparation and represents a completely new paradigm for them. Some also have to report on salary equality and payments to the government, depending on their activities.

So, how has ESG legislation in Switzerland affected banking and finance?

Christoph Vonlanthen: Regarding banking and finance, it’s interesting to note that this sector was among the first to be concerned with ESG. In 2021, FINMA, the Swiss regulator, introduced reporting obligations for supervised financial institutions. In-scope institutions are required to disclose how they manage climate-related risks as part of their annual financial reporting. This includes information around climate risk governance, strategy, risk management and quantitative information (targets and key data).

Additionally, the Swiss regulator has been quick to address greenwashing. As a result, several circulars now mandate that asset managers comply with FINMA’s guidelines. FINMA has clearly identified certain behaviours as deceptive, requiring asset managers to be cautious in how they portray their products, especially when claiming sustainability.

Given Switzerland’s heavy reliance on the banking industry, the financial sector has responded robustly. Beyond FINMA’s regulations, various associations, including the Swiss Banking Association, have introduced self-regulatory measures. These guidelines provide guidance as to how banks should structure their advisory processes and represent their financial products.

The banking and finance sector is thus at the forefront of ESG initiatives in Switzerland. The goal for the country is to establish itself as a leading green marketplace.

How can businesses best understand Swiss climate scores and what due diligence is required?

Christoph Vonlanthen: Swiss Climate Scores are an interesting development. These scores apply to asset managers offering investment opportunities to investors or structuring portfolios. The key question is how these products or portfolios are invested in companies aligning with the Paris Accord goals for 2050. While Swiss Climate Scores are not a company-level tool, they are very helpful for investors to understand and compare the environmental impact of their investments.

Businesses need to be aware of these scores, as the aim is to create incentives to direct capital towards environmentally friendly investments. This creates a trickle-down effect from investors to products and, subsequently, to businesses. Companies must ensure they publish non-financial disclosures to be scored based on the Swiss Climate Scores. The effectiveness of these scores depends on the quality of the information companies provide.

The adoption of Swiss Climate Scores is not yet widespread. Although rolled out by the Swiss government, the scores require a supportive ecosystem to gain wider acceptance and understanding among investors and companies. Many organisations have their own ratings.

Finally, can you offer any advice to firms to ensure they meet their non-financial disclosure obligations?

Christoph Vonlanthen: Meeting non-financial disclosure requirements is similar to meeting financial disclosure requirements. Companies must establish processes to gather all the necessary information, ensure it is compiled and analysed correctly, and report it properly. For example, when discussing due diligence and reporting duties related to child labour and the importation of conflict minerals/metals (3TG), companies need to identify which units, divisions or departments might be exposed to these risks. They then have to establish a system to gather this information and ensure it is reported accurately.

Anya George: We have been helping companies implement this process, which is quite similar to an internal control system for financial information. Establishing this system to ensure proper data collection is relatively new and requires significant time and close cooperation between company personnel and us. We provide guidance on what companies should do, while they implement our advice and ensure their actions align with regulations.