Implications for Swiss Companies

On May 24, 2024, the Council of the EU adopted the Corporate Sustainability Due Diligence Directive. The Directive, which is part of the EU’s transition to a climate-neutral and green economy, lays down rules to ensure that companies operating in the EU respect human rights and the environment throughout their operations and value chains.

The Directive represents a significant shift in the EU regulatory framework on sustainable corporate governance, and will have a substantial impact on Swiss companies that operate in the EU market or that are part of a group that does. We summarize the Directive’s main features and highlight the implications for affected Swiss companies.

A. Scope

The Directive applies extraterritorially to non-EU companies with annual net turnover exceeding €450 million in the EU (or the ultimate parent company of a group that reaches this threshold). It also covers EU and non-EU franchisors and licensors (or the ultimate parent company of a group) with annual royalties over €22.5 million and a net EU turnover exceeding €80 million.

Additionally, Swiss companies not directly covered may also be impacted indirectly as business partners of upstream or downstream in-scope entities.[1] In-scope financial institutions, for example, are required to conduct due diligence on their own operations and upstream business partners, such as investors, but not downstream business partners, such as borrowers.

Swiss companies that fall within these categories, are part of a group that does, or do business with in-scope entities, will be, directly or indirectly, subject to the Directive’s obligations.

B. Obligations

In-scope companies must integrate risk-based due diligence into their policies and risk management systems, covering both human rights and environmental impacts. These obligations are more detailed than and go beyond the due diligence obligations in the Swiss Ordinance on Due Diligence and Transparency, which are limited to child labor and certain minerals and metals.

The core due diligence obligations in the Directive include identifying and assessing actual and potential adverse human rights and environmental impacts, preventing and mitigating these impacts, monitoring effectiveness, and providing remediation.

In addition, in-scope companies must implement a climate transition plan, aligned with the Paris Agreement’s goal of limiting global warming to 1.5°C, and including time-bound and science-based targets for 2030 and five-year steps up to 2050. Companies must develop actions to achieve these targets and update their transition plans annually.

The Directive also requires companies to communicate publicly regarding their due diligence efforts, with annual statements on their websites, and to engage with stakeholders, establish a notification mechanism and complaints procedure, and monitor the effectiveness of their due diligence measures.

C. Penalties for Non-compliance

Member States will impose pecuniary and non-pecuniary penalties for breaches. Maximum fines shall be not less than 5 percent of net worldwide turnover in the preceding financial year. Non-compliant companies may also be barred from participating in public contracts and tenders, and authorities may publicly «name and shame» companies that fail to meet due diligence obligations.

Companies may also be liable for civil damages if their failure to conduct proper due diligence harms people or the environment. This reverses the typical burden of proof in favor of claimants, who may be individuals, groups, or organizations affected by the adverse impacts. The statute of limitations for such civil claims is five years, or not lower than the minimum period under national regimes for general civil liability.

D. Compliance Timeline

The Directive will enter into force twenty days after its official publication in the EU’s Official Journal, after which Member States will have two years to transpose the Directive into national laws.

For in-scope non-EU companies, compliance and reporting obligations will phase in depending on size and turnover. For those with annual net EU turnover exceeding €1.5 billion, compliance will begin three years after entry into force (2027); more than €900 million, after four years (2028); more than €450 million, after five years (2029).

E. Next Steps

Swiss companies potentially within the Directive’s scope should assess their current policies and practices against the Directive’s requirements and prepare to implement the necessary due diligence measures and transition plans. All Swiss companies should evaluate their role in the value chain of in-scope companies and anticipate potential requests for information or cooperation from their business partners.

Swiss companies should also monitor the development and implementation of the Directive’s requirements and further guidance from the EU, as well as the possible further development of due diligence legislation in Switzerland.

[1] In-scope EU entities include companies formed under the laws of a Member State that have over 1,000 employees on average during the course of a financial year and an annual net worldwide turnover exceeding €450 million.