The responsible business initiative’s counterproposal could come into effect as early as 1 January 2022 and companies should not waste time to ask the right questions and define the next steps.
In a divisive referendum held in Switzerland on 29 November 2020, the Responsible Business Initiative (RBI) was rejected at the ballot box despite gaining 50.7% of popular vote. The reason for this defeat was that it had failed to win support in a majority of cantons – a necessary condition for a public initiative to be enacted in Switzerland.
The indirect counterproposal, which will come into force following the rejection of the RBI, aims to hold Swiss companies accountable for their actions by compelling them to increase reporting on environmental and social issues and fulfilling due diligence requirements, in particular regarding child labor and conflict minerals. The societal shift toward responsible business conduct is gaining momentum and is here to stay, especially now it’s entered the Swiss regulatory arena.
Entry into effect and next steps
The start of the referendum period has not begun as the counterproposal has not yet officially been published in the Swiss Federal Gazette. Once published, there will be a 100-day window in which an optional referendum can be requested. If no such appeal is made, the Federal Council will decide when the new transparency and due diligence obligations will enter into force. Even though no timeline has been officially communicated, we anticipate full or partial entry into force in 2022. Companies in Switzerland affected by the new rules are therefore well advised to start taking preparatory steps to ensure compliance with additional reporting and due diligence obligations once they enter into force.
What does this mean for companies in Switzerland?
We believe that reporting as well as risk and compliance management are the areas most severely affected by this new regulation. The transition will require the involvement of top management. While an audit of the non-financial reporting is not formally required, the approval of reporting by the board of directors and the audit committee will likely raise expectations regarding the robustness of the disclosed information. Our experience in European countries, where the EU NFRD (with similar wording to the Swiss counterproposal) has entered into force, shows an increase in demand for assurance by an independent auditor. We’ve observed this trend even in countries where the implementation of the directive did not come with a formal audit requirement. Hence, assurance appears to be becoming established as common best practice.
Whilst no formal audit requirement is stipulated for non-financial reporting, compliance with the fulfillment of due diligence obligations on minerals and metals will be subject to review by an independent third party. Additionally, while the applicability of non-financial reporting requirements is clearly defined, the top management of many companies will need to decide if the conditions regarding conflict minerals and child labor are met. To ensure adequate time to identify and implement the best solutions, you should engage as early as possible in understanding how the new legislation affects your company, what the current state of your non-financial reporting and compliance management is and how you envisage your end-goal.
Audit committee and BoD involvement
Looking toward the 2021 proxy season (mid-April to mid-June) – during which many companies hold their annual shareholder meetings – EY’s Center for Board Matters recently noted in its 2021 proxy season preview that “investors want boards to help companies adapt their strategies for a future in which prioritizing stakeholders and considering environmental and social impacts will be critical to building resilience and creating long-term value.” One of the emerging areas of focus for Boards, according to the study, is understanding and valuing the environmental and social impacts of a company’s products and operations. The new legislation involves the audit committee and will require BoD approval so we highly recommend that you engage in a discussion on the related topics early on.
New due diligence obligations outside of Switzerland
The counterproposal of the RBI increases the due diligence requirements for companies in a trend that follows the emergence of new initiatives and laws across Europe. Indeed, Switzerland is not the only country that aims to amend its laws for increased corporate responsibility. Across Europe, a clear trend is emerging toward holding companies responsible and liable for misconduct throughout their supply chains. For example, France has recently adopted new corporate due diligence regulations (“Droit de Vigilance”) and Germany is in the process of drafting regulation along the same lines of the RBI (“Lieferkettengesetz”). Furthermore, the European Commission is expected to propose new due diligence rules on human rights and the environment throughout supply chains in 2021. These rules will likely go beyond what is asked by the Swiss counterproposal and will also affect Swiss companies due to the interconnectivity of their supply chains. Moreover, increasing requirements for financial institutions to incorporate environmental – such as climate – and social considerations in their offerings are expected to trickle down to companies, eventually also affecting financing conditions. The OECD states that “sustainable finance, as a practice and policy concept, is on the rise globally. The volume of “responsible” or “sustainable” financial products and strategies has grown exponentially in the past 10 years, driven largely by increased demand from beneficiaries, as well as policy signals that the financial sector should be a driving force in achieving global sustainability agendas.”
Accordingly, companies in Switzerland need to be aware of the broader expectations that will need to be pushed through their supply chain beyond the Swiss regulations. You could do this, for example, by initiating an assessment of how you are currently managing your third-party reviews and by identifying gaps in regard to future expectations.
Getting to the “next” by focusing on the “now”
An important takeaway from the vote, aside from the change in legislation, is the sentiment that is coursing through the fabric of Swiss society. This voting sentiment flows into how our society is demanding greater responsibility from the organizations they work for, buy from and invest in. Stakeholders are increasingly demanding that corporates apply responsible business conduct and thus also create long-term value for their societies, which supports the distinct purpose of sustaining a business for the long term.
“It’s clearer than ever before that success is about more than our bottom line today; it’s also about helping those around us thrive in the long-term. CEOs don’t have to choose anymore between doing what’s good for business and good for their stakeholders. They can – and must – do both.” Carmine Di Sibio, EY Global Chairman and CEO
The importance of non-financial performance and its reporting is increasingly reflected in regulatory requirements, supply chain practices and investment decisions. The applicability of such non-financial reporting requirements is clearly defined in the RBI’s indirect counterproposal and top management of many companies will also need to evaluate whether current due diligence reporting is already an integral part of existing non-financial reporting. They will further need to assess whether the conditions regarding due diligence are met and, if so, work on their due diligence management systems. Some may also need to initiate an external review regarding due diligence on conflict minerals and metals and potentially also child labor. Finally, we would suggest future alignment with the increasing non-financial reporting and due diligence requirements in the EU. By focusing on the now, companies can use this opportunity to also ensure that they are aligned to the next wave of responsible business conduct.
Want to learn more about the outcome of the vote on the Responsible Business Initiative? EY explores key questions in the RBI FAQ overview. Read more
Want to watch the replay session of the webcast: The day after the vote: how will the Responsible Business Initiative change your business? Watch here