Corporate climate reporting: Ethos’ position on the new legislation put forward by the Swiss Federal Council

Following the rejection of the popular initiative for responsible businesses in November 2020, the Swiss Federal Council set about implementing the indirect counterproposal adopted by parliament. It instructed the Federal Department of Finance to draw up an implementing ordinance to clarify the obligation for large companies based in Switzerland to be accountable on climate issues. This ordinance, which is based on the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), aims to promote the availability of relevant and comparable data on climate issues and objectives. It was submitted to the consultation procedure until 7 July 2022 and will be applicable from the 2023 financial year.

The Ethos Foundation, which brings together more than 230 pension funds with total assets exceeding CHF 350 billion, is affected by this ordinance in two ways. As a representative of shareholders at the annual general meetings of listed companies, it will have to make voting recommendations on sustainability reports submitted for shareholder approval. In addition, the information published by companies will be essential to help the pension funds which are members and clients of Ethos to be accountable for their own greenhouse gas (GHG) emissions financed through their investments.

The Ethos Foundation thus welcomes the intention of the Federal Council to introduce obligations to disclose climate-related information for companies of a certain size, considering not only the financial risks that climate change present for their business activities but also the effects that their own activities may have on the climate (double materiality).

Completeness and verification of published data

The Ethos Foundation considers however that the ordinance only insufficiently allows investors to truly measure the effectiveness of corporate transition plans. In fact, it does not fully guarantee the publication of appropriately detailed, comparable, and relevant climate-related information, which is the only way to enable investors to assess the overall performance of companies and their ability to align their business model with the transition necessary to achieve the Swiss and global objective of ‘Net Zero’ GHG emissions.

In its public statement (in French), the Ethos Foundation considers that the ordinance must be improved on the following points:

• The ordinance is imprecise and contains vague wording such as "when possible and appropriate", "ideally" or "if necessary", which allows the companies concerned to avoid exhaustive publication of their GHG emissions. In particular, Ethos is convinced that it should be mandatory for companies to publish and set reduction targets for all GHG emissions, including indirect emissions related to the use of their products or their supply chains. The current proposal stipulates however that they will have to publish all GHG emissions, including the main sources of scope 3 emissions, only “when possible and appropriate”;

• Ethos considers that the publication of intermediate GHG emission reduction targets over 5, 15 and 30 years, should also be mandatory. However, the current version of the explanatory report mentions that the establishment of such intermediate objectives would be “ideal”;

• The ordinance should require publication of GHG emissions for at least the last two years. This is the only way to allow investors to compare changes on a like-for-like basis, as is the case in financial accounting;

• The ordinance should mandate an independent verification of the climate report. In order to ensure the reliability of the information published, Ethos believes that companies affected by the ordinance should be obliged to have it verified by an independent third party. This mandatory verification is also provided for by the European CSRD directive, which requires the statutory auditor to provide limited assurance on the sustainability information published by a company. This requirement should therefore be included in the Swiss ordinance;

• Ethos also regrets that the question of the approval of the non-financial report by a company body is not addressed in the ordinance. Indeed, the Swiss Code of Obligations (art. 964c) emphasizes that it must be approved by the body responsible for the approval of the annual accounts, i.e. the annual general meeting. However, it is not clear whether the report must be approved by a binding or by an advisory shareholder vote. For the Ethos Foundation, the fact that it must be approved by "body responsible for the approval of the annual accounts" tends to confirm that the vote at the general meeting will be binding, as is the case for the vote on the annual accounts.