Publication of Ordinance on New Due Diligence and Transparency Obligations

Abstract

Due Diligence and Transparency Obligations re Minerals and Metals from Conflict Areas and Child Labor

On November 29, 2020, the popular initiative «The Responsible Business Initiative – Protecting human rights and the environment» was rejected and, thus, indirectly the counterproposal of the Swiss Parliament (the Counterproposal) was approved. Appeals have been lodged with the Federal Supreme Court in connection with the intervention in advance of the vote on the initiative by national churches and parishes. As a consequence, the 100-day referendum period on the Counterproposal could not yet commence. But now the Federal Supreme Court has written off these appeals as groundless and has not acted on two further appeals. We therefore expect the Federal Council to officially publish the Counterproposal and thereby start the referendum period in the coming days or weeks. Provided there is no referendum against the new reporting and due diligence obligations, the new statutory provisions are currently expected to enter into force on January 1, 2022.

On April 14, 2021, the Federal Council opened the public consultation procedure on the Ordinance on Due Diligence Obligations and Transparency Regarding Minerals and Metals From Conflict Areas and Child Labor (the Ordinance). The consultation period will last until July 14, 2021. The Ordinance will enter into force at the same time as the new legal provisions.

Ordinance on Due Diligence Obligations and Transparency Regarding Minerals and Metals from Conflict Areas and Child Labor (VSoTr)

With regard to the sections on conflict minerals and child labor, the new statutory provisions contain delegation norms that mandate the Federal Council to issue implementing provisions. No similar delegation norms are included in the section on «transparency on non-financial matters» (CSR reporting). Accordingly, the Ordinance covers the sections on conflict minerals and child labor of the new statutory provisions only.

The Ordinance defines exemptions from the due diligence and reporting obligations in the areas of minerals and metals (art. 2 and 3 of the Ordinance) and child labor (art. 4 and 5 of the Ordinance), exemptions from the due diligence and reporting obligations due to compliance with internationally recognized and equivalent regulatory frameworks (art. 6 of the Ordinance) and contains more detailed provisions on the due diligence obligations (art. 7 – 13 of the Ordinance). In addition, the Ordinance defines certain terms (art. 1 of the Ordinance) and contains provisions regarding the consolidation of the reporting (Art. 14 of the Ordinance).

Exemptions From the Due Diligence and Reporting Obligations in Connection With Minerals and Metals

Pursuant to Art. 964quinquies para. 2 of the Counterproposal, the Federal Council shall determine annual import quantities of minerals and metals up to which a company is exempt from the due diligence and reporting obligations. Although the wording of the delegation norm only refers to import quantities, the Federal Council specified both import and processing quantities in the annex to the Ordinance. These limits are based on the thresholds foreseen in the Regulation (EU) 2017/821 on conflict minerals. In the context of a group, import and processing quantities of all group entities are to be taken into account for the determination whether the thresholds are reached.

The import and processing of recycled metals is not subject to the due diligence and reporting requirements, regardless of any thresholds. In this case, the relevant company must, however, document and prove that the metals originate exclusively from recycling or are extracted from scrap. Not covered by this exemption are (unprocessed) minerals or by-products of ores that do not contain tin, tantalum or tungsten.

Exemptions From the Due Diligence and Reporting Obligations in Connection With Child Labor

The Federal Council defines in the Ordinance under which conditions companies do not have to verify whether there is a reasonable suspicion of child labor. For this purpose, the Ordinance provides for three steps:

If a company, together with controlled companies, falls below two of the following thresholds in two consecutive financial years:

  1. a) total assets of CHF 20 million;
  2. b) revenues of CHF 40 million;
  3. c) 250 FTEs on annual average;

it does not need to perform any further examination.

If a company reaches or exceeds these thresholds, the company must assess whether the countries from which it sources products or services present low, medium or high child labor risks. Pursuant to the statutory provisions, the risk assessment would in principle apply to all countries in the supply chain. Since this is de facto very difficult to implement even when applying due care, the risk assessment may, pursuant to the explanatory report to the Ordinance (the Explanatory Report), be limited to the country of production according to the indication of origin («made in»). The risk analysis must be carried out annually. For purposes of the risk analysis, the companies may consult the UNICEF Children’s Rights in the Workplace Index (UNICEF Index), which currently covers 195 countries. If the country of origin presents low risks (risk classification «basic» according to the UNICEF Index), the relevant company does not have to perform any further examination.

If the assessment shows that medium or high risks exist (risk classification «enhanced» or «heightened» according to the UNICEF Index), a company must confirm whether there is a reasonable suspicion of child labor in relation to a specific product or service. A suspicion of child labor is reasonable if based on one or more concrete indications or perceptions there is ground to assume that a product has been manufactured or a service is being provided with the use of child labor. However, not every activity performed by a person under the age of 18 automatically constitutes child labor. Whether a certain activity constitutes child labor depends on the age, type of work, and working conditions. ILO Convention No. 138 provides that each member ratifying the Convention must specify a minimum age for admission to employment. Under certain conditions, ILO Convention No. 138 permits light work for schoolchildren and work in the context of vocational training.

The company is only exempt from the due diligence and reporting obligations in the area of child labor if the examination does not reveal any concrete, justified suspicion of child labor.

Exemptions From the Due Diligence and Reporting Obligations Due to Compliance With Internationally Recognized Regulatory Frameworks

Art. 5 of the Ordinance specifies the conditions under which companies are exempt from the due diligence and reporting obligations due to the compliance with internationally recognized and equivalent regulatory frameworks.

Companies operating in the minerals and metals sector must comply either with (i) the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (OECD Conflict Minerals Guidance) of April 2016, including all annexes and supplements, or (ii) Regulation (EU) 2017/8214, in each case in their entirety, prepare a report in accordance with the chosen regulatory framework, and mention in the report the internationally recognized regulatory framework applied.

Companies that offer products or services that are suspected of having been produced using child labor must apply ILO Conventions No. 138 and 182 and either (i) the «ILO-IOE Child Labour Guidance Tool for Business of December 15, 2015» (ILO-IOE Child Labour Guidance Tool) or (ii) the «OECD Due Diligence Guidance for Responsible Business of May 30, 2018», all in their entirety, prepare a report in accordance with the chosen regulatory frameworks, and mention in the report the internationally recognized regulatory frameworks applied.

According to the Explanatory Report, the references to the regulatory frameworks are «static» and not «dynamic» references, i.e., changes to the regulatory frameworks are not automatically authoritative, but require an amendment to the Ordinance.

Due Diligence Obligations, Audit

Furthermore, the Ordinance contains specifications on the due diligence obligations, i.e., on the design of the supply chain policy (art. 7 and 8 of the Ordinance), on the system to trace back the supply chain (art. 9 and 10 of the Ordinance), on the identification and assessment of risks (art. 11 of the Ordinance), on the risk management plan and measures (art. 12 of the Ordinance) as well as on the audit regarding compliance with the due diligence obligations in the minerals and metals sector by an auditor (art. 13 of the Ordinance).

According to the Explanatory Report, the due diligence obligations (including the reporting obligations) constitute an ongoing, repetitive process. The due diligence obligations are best efforts obligations and not strict performance obligations. Therefore, the due diligence obligations do not prohibit the import of minerals and metals from conflict and high-risk areas or of product or services with justified suspicion of child labor. Rather, consumers, equity and debt providers, and actors and organizations of civil society should act as sanctioning body.

Art. 7 and 8 of the Ordinance contain the formal and material requirements for the supply chain policy.

Art. 9 and 10 of the Ordinance specify the requirements for the system to trace back the supply chain. In this context, the system should ensure that traceability is guaranteed to the best extent possible (duty of care). Since the verification of the supply chain in connection with child labor can be more difficult to perform in practice than performing the due diligence obligations regarding minerals and metals, according to the Explanatory Report, a risk-based approach is to be selected for complex supply chains, i.e., the system and the intensity of the backtracing of the individual supply chains are to be prioritized and graded depending on the risks.

Art. 11 of the Ordinance contains further explanations on the identification and assessment of risks. According to the Explanatory Report, the risks must be identified and assessed, taking into account in particular the probability of occurrence and the level of harmful effects. Also the obligation to identify and assess the risk is best efforts obligation only.

The risk management plan in accordance with Art.12 of the Ordinance shall represent the response to the identified and assessed risks. Among other things, it should contain a strategy regarding prevention and mitigation of the identified risks. For the preparation of the risk management plan, the companies should follow, in particular, Annex I of the OECD Conflict Minerals Guidance and the ILO-IOE Child Labour Guidance Tool. Based on the risk management plan, the companies should take measures to eliminate, prevent or minimize the risks in the supply chain.

Consolidation in reporting

Companies required to prepare consolidated financial statements must prepare a consolidated report.

A company domiciled in Switzerland which is controlled by a legal entity domiciled abroad that prepares an equivalent report does not have to prepare a separate report. In this case, the Swiss company must indicate in the notes to the financial statements which other legal entity included it in its report and publish the report of the foreign company.

Entry into force

As mentioned, we currently expect the Ordinance to enter into force on January 1, 2022. Should a referendum be raised against the new reporting and due diligence obligations, the entry into force of the new reporting and due diligence obligations together with its implementing provisions would be delayed.

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