ESG Trends – What the boards of all companies should know about ESG regulatory trends in Europe

Alain Pietrancosta is Professor of Law at the Sorbonne Law School at the University of Paris and Alexis Marraud des Grottes is a partner at the Paris office of Orrick Herrington & Sutcliffe LLP. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr; and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

France and Europe are at the forefront of ESG regulation. They have taken steps that go far beyond mere reporting requirements, aiming at designing a new capitalism. This so-called responsible capitalism will have significant consequences for European companies, but also for non-European companies doing business in Europe, as the EU shows more and more inclination to enforce its ESG regulation on a worldwide basis. At a time when the United States is avidly debating the advisability of introducing climate disclosure rules for public companies, or additional information regarding professional investors’ ESG investment practices, a closer look should be taken at what Europe, led by France, has already accomplished in this area and where major current reforms are leading. From a regulatory viewpoint, this will help measure the gap between the two continents and perhaps, in some areas, draw avenues for rapprochement so that multinationals do not have to undergo a mix of regulations and ensure that neither companies nor investors are faced with a fragmented proliferation of standards, frameworks and parameters. From a practical standpoint, it is of the utmost importance for the boards of directors of multinational companies, in this period of rapid change, to identify key ESG issues and better anticipate the European regulatory efforts to green the economy.

Those who wonder what tomorrow’s ESG regulation may be like should usefully turn to the EU, which has initiated significant reforms in this area for several years, most often based on the French model. France is indeed a forerunner in terms of legal developments and an undisputed leader in social and environmental matters. It is a source of inspiration that fuels new aspirations in Europe. In this respect, it is worth noting that on June 30, 2022, the day before the end of the French presidency of the EU, the European Parliament and the Council reached an agreement on the “Corporate Sustainability Reporting Directive” (CSRD) requiring large and listed companies to publish annually sustainability information, extending the scope and increasing the substance of the 2014 “Non-Financial Reporting Directive” (NFRD).

As expected, the adoption of such regulations gives rise to the usual debates, mainly around the fact that it is likely to create legal uncertainty or impose additional constraints on companies. One thing is clear, however: the French experience has shown that companies can integrate these “constraints” with surprising speed, sometimes turning them into opportunities for consumers and partners, even if there is also evidence that new legal risks are concomitantly generated.

Aiming to offer an understanding of what boards of all companies should know about ESG regulatory trends in Europe, our article reviews the historical trends in France and Europe in terms of ESG legal requirements (I), analyzes the recent legal developments applying to EU but also non-EU companies in terms of ESG (II), consider the possibility of additional ESG developments in France and at the European or global levels (III), and offers some views of the reasons why France and Europe are embarking on these paths of capitalism evolution based on ESG (IV).

I. What are the historical trends in France and Europe in terms of ESG legal requirements?

Extra-financial reporting. France was the first European country to move towards a system of legally binding standards, notably with the Law of May 15, 2001 on new economic regulations (NRE), which introduced non-financial disclosure requirements for certain French listed companies. On the climate front, the Law of July 12, 2010 on the national commitment to the environment requires large private and public entities to disclose at least every three years the amount of their greenhouse gas emissions, and to describe the actions planned to reduce them (scope 1 and 2 since December 31, 2012 and scope 3 from December 31, 2023). The Law of August 17, 2015 for the energy transition and green growth further obliged every company listed on a regulated market to include in its annual management report, “indications on the financial risks related to the effects of climate change and the presentation of the measures taken by the company to reduce them by implementing a low-carbon strategy in all the components of its activity”. In the EU, the incorporation into legally binding legislative or regulatory regimes of ESG is mainly reflected in the NFRD of October 22, 2014, requiring disclosure of non-financial information by large EU public-interest entities, supplemented by non-binding guidelines (2017), including the most recent ones (June 2019) on corporate climate-related information reporting. Such public reporting on how a qualifying company “takes into account the social and environmental consequences of its activity” is said to be essential to achieve the transition to a sustainable global economy, combining long-term profitability with social justice and environmental protection. As announced in the “Green Deal for Europe”, the NFRD is currently under review, as part of the strategy to strengthen the foundation for sustainable investment. The EC published a proposal on April 21, 2021 which will change the directive’s name from NFRD to CSRD.

Diversity in governance. France has also been a forerunner when it comes to board diversity. As its 2011 reform has just found an echo in a recent European Directive proposal, it recently extended the diversity requirement from the boards of directors to management.

Board diversity. On January 20, 2011, France adopted the Copé-Zimmermann Law, imposing – in practice – quotas of women on the boards of large and listed French corporations. This Law was a decisive step in the fight for gender equality. This Law imposed a 20% gender diversity requirement in 2014 and a 40% requirement in 2017 on the boards of directors of listed companies and companies with more than 500 employees and total assets or revenues of more than 50 million euros. Because of this Law, France holds the first place in Europe in terms of the number of women on the boards of directors of its large companies. The penalties for non-compliance with the Law include the nullity of appointments that do not comply with the parity objective. This nullity does not entail the nullity of the deliberations in which the irregularly appointed director took part. Furthermore, the Act provides for the suspension of directors’ fees for all members of the board, which will be reinstated when the composition of the board of directors becomes regular. Despite the progress made on the ground, this legal regime was later on tightened: the Law of August 4, 2014 for real equality between women and men set the new workforce threshold for the application of these provisions at 250 employees, instead of 500, as of January 1st, 2020; and the PACTE Act toughened the penalties for non-compliance, with a provision invalidating deliberations by a board of directors or supervisory board whose composition does not comply with the obligations of balanced representation of the two genders.

On June 7, 2022, the Council and the European Parliament reached a provisional political agreement on new EU legislation aimed at promoting a more balanced representation of women and men on the boards of listed companies. The Council and the European Parliament have therefore agreed that European listed companies should aim to have at least 40% of their non-executive directorships be held by members of the underrepresented gender by 2026. If member states choose to apply the new rules to both executive and non-executive directors, the target would be 33% of women in the EU as directors by 2026.

Management diversity. France has gone beyond boards of directors. With regard to executive committees, the somewhat unnoticed provisions of a Law of September 5, 2018 for the freedom to choose one’s professional future, require companies whose securities are admitted to trading on a regulated market to include in their corporate governance report, “information on the manner in which the company seeks to achieve a balanced representation of women and men within the committee set up, where applicable, by the general management with a view to assisting it on a regular basis in the performance of its general duties and on the results in terms of gender balance in the 10% of positions of greatest responsibility”. The 2019 PACTE Act extended the scope of the gender diversity requirement to the appointment of deputy managing directors. More recently, the Rixain Law of December 24, 2021, whose aim is to accelerate economic and professional equality, has sought to increase the participation of women in economic and professional life and the Law provides for several measures in this direction including the establishment of quotas of 40% in senior positions in large companies, a new equality index in higher education, better access of female entrepreneurs to public investment. For companies employing more than 1,000 people, as of March 1, 2026, the share of persons of each gender among senior managers and management bodies may not be less than 30% and as of March 1, 2029, this quota will be raised to 40%. The Law provides that if the companies concerned fail to comply with the obligation to publish the representation gaps in 2029, they will have two years to comply. It is understood that after one year, these companies will have to publish progress targets and the corrective measures adopted. If, in spite of this, the set quotas are still not reached at the end of this two-year period, the employer may be sanctioned with a financial penalty corresponding to a maximum of 1% of the compensations paid to employees during the calendar year preceding the expiry of the indicated period.

Fight against corruption. In France the legislator has also required French companies to implement various anti-corruption measures. The Sapin II Law of December 9, 2016 requires companies exceeding certain thresholds to take measures to prevent and detect, in France or abroad, acts of corruption or influence peddling. These measures include the establishment of a code of conduct and a risk map, the implementation of an internal whistleblowing system and the implementation of a disciplinary system to punish violations of the code of conduct. The provisions are applicable to French companies with at least 500 employees, or belonging to a group of companies whose parent company has its registered office in France and whose workforce includes at least 500 employees, and whose revenues exceed 100 million euros. This obligation also applies to all of its consolidated subsidiaries or companies that it controls. This system therefore applies indirectly to any foreign company when it is a subsidiary of a French group.

From a “Say on Pay” to a “Decide on Pay”. In April 2017, the European Shareholders’ Rights Directive II (“SRD 2”) was approved. It aims to encourage long-term investment by shareholders, strengthen transparency between investors and issuers and facilitate the exercise of shareholders’ rights. This European Directive also requires European listed companies to establish a compensation policy describing, in particular, the various components of fixed and variable compensation, including any bonus or benefit in any form whatsoever, that may be granted to executives. The principle of a “Say on Pay” is notably enshrined in the Directive. France had previously recommended the implementation of a Say on Pay through its main corporate governance Code (AFEP/MEDEF) on a “comply or explain” basis. In the course of the SRD 2 negotiations, the French lawmakers decided to impose it with the above-mentioned Sapin II Law. French companies whose securities are admitted to trading on a regulated market are from now on obliged to submit a resolution to the AGM “at least once a year” on its remuneration policy regarding the chairman, chief executive officers or deputy chief executive officers. At the ex post vote the general meeting decides annually on the individual remuneration paid to executives in respect of the previous financial year, by separate resolutions for the chairman of the board of directors or the supervisory board, the chief executive officer, the deputy chief executive officers, or for the chairman of the management board and the other members of the management board or the sole chief executive officer. The law specifies that variable and exceptional remuneration is not payable in case of a negative ex-post vote, which takes the AGM vote beyond a mere “say” minimally imposed by the European Directive. The legal regime was then reinforced on two occasions: the PACTE Law required the description in the company annual report of the variable components of remuneration determined on the basis of the application of non-financial performance criteria, as well as an “equity ratio” (the level of remuneration of each corporate officer compared to the average remuneration on a full-time equivalent basis of the company’s employees other than corporate officers, and changes in this ratio over at least the five most recent financial years, presented together and in a manner that allows for comparison); an order dated November 27, 2019 relating to the remuneration of corporate officers of listed companies, without changing the general framework, brought it more in line with the requirements of the European SRD 2.

Consideration for social and environmental issues. France has gone a long way to ensure social issues are taken into consideration by companies. An article of the PACTE Law changed a core provision of French company law by adding a second paragraph to Article 1833 of the Civil Code, according to which “the company is managed in its interest, taking into consideration the social and environmental issues related to its activity”. This provision promotes a behavioral standard affecting decision-making processes so that they integrate the social and environmental issues that result from the activity of all French companies. Thus, ESG is now integrated into the very heart of management objectives to accommodate ethics, compliance, social and environmental responsibility. Company law has thus been mainly mobilized to meet these new imperatives, although the new requirement is not conceived as a consecration of a multifiduciary or a stakeholder model. Non-compliance with this requirement is not sanctioned by the nullity of the acts or deliberations of the bodies of the company, as it derives from the article 1844-10 of the Civil Code. The taking into consideration of social and environmental issues is a “best-efforts” obligation. It may encourage liability claims – from ESG investors or even third-party ones – based on insufficient consideration for social and environmental issues. In the absence of a business judgement rule, this new provision does not by itself prevent judges from excessive interference in the management of companies. Even if it is difficult to envisage French judges, who are far from being business experts, interfering substantially in the management of French companies, some might be tempted, however, as shown by the first court decision, dated February 11, 2021, which to our knowledge refers to the reform of Article 1833.

In line with the French legal reform, the draft of the European Directive on corporate sustainability due diligence (“CS3D”) contains an Article 25 that aims to “clarify” the “directors’ duty of care” in European large corporations. This Article requires Member States to “ensure that, when fulfilling their duty to act in the best interest of the company, directors of companies referred to in Article 2(1) take into account the consequences of their decisions for sustainability matters, including, where applicable, human rights, climate change and environmental consequences, including in the short, medium and long term”. EU member states will also have to ensure that their laws, regulations and administrative provisions for breaches of directors’ duties also apply to these provisions, thus increasing responsibilities on management and board members of EU companies. The difficulties of interpretation and the leeway afforded to judges by such wording gives rise to doubts as to the contemplated clarification and harmonisation objectives of the text.

An optional “raison d’être”. The French PACTE Law of 2019 has also provided for the possible adoption of a raison d’être in the bylaws. The raison d’être is, according to the terms of the Law, “made up of the principles with which the company equips itself and for the respect of which it intends to allocate means in the realization of its activity”. It is an approach that allows a global reflection on the history and values of the company, the societal impact of its activity and more generally on the responsibility that the company intends to carry in the future. The “petites sociétés” are called upon to become part of the “grande société”, to reflect on their positive contributions and to justify in global terms their societal usefulness, beyond their mere material component, in terms of the adequacy of their values and operating methods in relation to political correctness of the time. Companies are invited to verify that their private ecosystems are compatible with the general ecosystem, through an exercise of introspection. For instance, at Atos, the raison d’être “is to contribute to shaping the information space”; at Veolia Environnement, “to contribute to human progress, by firmly adhering to the Sustainable Development Goals defined by the United Nations, in order to achieve a better and more sustainable future for all”; at Carrefour, “to offer our customers quality services, products and food that are accessible to all through all distribution channels”; at Michelin, “to offer everyone a better way forward”; at Crédit Agricole, “to act every day in the interest of our customers and society”; at Danone, “to give pleasure back to food by constantly innovating; to generate superior, sustainable and profitable growth”; or at Total Energies, to “help bring more affordable, available and cleaner energy to more people”.

The raison d’être should not be seen as a purpose competing with the one, enshrined in law, for which the company was formed – to make a profit. It should be considered as a description of how the company intends to behave in order to achieve that legal purpose or an enlightened realization of that purpose through the company’s ambition for its place and role in the community, thus serving a differentiation function, like any externalized corporate purpose, helping the selective adherence of stakeholders. According to a study, 54.5% of the formulations are “factual”, i.e. focused on the valuation of the company’s activity, and 27.3% are “pragmatic” because they emphasize performance, and only 18.2% are “aspirational”.

There are, however, legal consequences flowing from the introduction of a raison d’être in the bylaws. When a raison d’être has been defined in the bylaws of a stock corporation, the PACTE Law specifies that the board of directors is required, in performing its duties, to take the company’s raison d’être into consideration. This may contribute to the reluctance of listed companies to introduce a raison d’être in the bylaws. If 80% of CAC40 companies declare a formalized raison d’être, only a handful have amended their bylaws.

The debate around the “corporate interest” and the “raison d’être” of companies has largely become international, commonly coined under the notion of “corporate purpose”. In the United States, the cradle of shareholder primacy, a significant evolution seems underway, which finds spectacular public expressions. For example, we can refer to the Accountable Capitalism Act, introduced in August 2018 by Senator Warren. It can be mentioned the famous Business Roundtable’s Statement the following year, designed to outline a modern standard for corporate responsibility. Must be remembered Joe Biden’s statement that “the idea that a corporation’s sole or primary responsibility is to its shareholders is not only wrong, but an absolute farce”, or the ongoing restatement of the law of corporate governance (ALI). On the European side of the Atlantic, these issues are now fully addressed by the European Commission, which has initiated work and launched major public consultations in order to develop regulations imposing common standards of diligence and/or sustainable governance, some of which are directly inspired by the French model. Far from being geographically confined, these standards are likely to have a global scope, in that they will cover the global governance of European companies, but possibly, in their public reporting, due diligence and climate change dimensions, also that of non-European companies with a significant economic presence on the territory of the EU.

II. What are the recent legal developments applying to EU but also non-EU companies in terms of ESG?

Enhanced extra-financial reporting – CSRD. In the EU, an impressive body of regulation has been developing over the last few years to ensure social and environmental transparency of large companies, thus facilitating the judgement of their stakeholders in terms of sustainability. As mentioned, the movement has mainly started with the NFRD, i.e. the European Directive of October 22nd, 2014, requiring disclosure of non-financial and diversity information by large EU public-interest entities. As announced in the “Green Deal for Europe”, the NFRD is currently under review, as part of the strategy to strengthen the foundation for sustainable investment. The European Commission published a proposal on April 21, 2021 and a political agreement was reached on June 30, 2022.

The scope of companies covered will be extended to include all large EU companies and listed companies (except listed micro-companies), increasing the number of covered companies from 11,600 to 49,000 (i.e. from 47% of the turnover of all limited liability companies to 75%). A significant innovation lies in the inclusion of non-EU undertakings that have a significant activity on the EU territory, i.e. a net turnover of more than EUR 150 million in the Union and that have a large or listed subsidiary, or a branch in the EU that has generated a net turnover of more than EUR 40 million.

In addition to extending its personal scope, the CSRD modifies the objective scope and content of reporting obligations by proposing more precise and numerous requirements (content, information format, third-party assurance, etc.), in part in response to investors’ increasing expectations and regulatory developments. The “double materiality” of information is reflected in the requirement to include in the management report both how sustainability issues affect the company’s performance (the outside-in perspective) and how the company itself impacts people and the environment (the inside-out perspective). Such information must contain in particular:

  • “a brief description of the undertaking’s business model and strategy, including: (i) the resilience of the undertaking’s business model and strategy to risks related to sustainability matters; (ii) the opportunities for the undertaking related to sustainability matters; (iii) the plans of the undertaking, including implementing actions and related financial and investment plans, to ensure that its business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement and the objective of achieving climate neutrality by 2050 as established in Regulation (EU) 2021/1119 (European Climate Law), and where relevant, the exposure of the undertaking to coal, oil and gas-related activities; (iv) how the undertaking’s business model and strategy take account of the interests of the undertaking’s stakeholders and of the impacts of the undertaking on sustainability matters; (v) how the undertaking’s strategy has been implemented with regard to sustainability matters;
  • a description of the time-bound targets related to sustainability matters set by the undertaking, including where appropriate absolute greenhouse gas emission reduction targets at least for 2030 and 2050, a description of the progress the undertaking has made towards achieving those targets, and a specification of whether the undertaking’s targets related to environmental matters are based on conclusive scientific evidence;
  • a description of the role of the administrative, management and supervisory bodies with regard to sustainability matters, and of their expertise and skills to fulfil this role or access to such expertise and skills;
  • a description of the undertaking’s policies in relation to sustainability matters; (da) information about the existence of incentive schemes offered to members of the administrative, management and supervisory bodies which are linked to sustainability matters;
  • a description of: (i) the due diligence process implemented by the undertaking with regard to sustainability matters, and where applicable in line with EU requirements on undertakings to conduct a due diligence process; (ii) the principal actual or potential adverse impacts connected with the undertaking’s own operations and with its value chain, including its products and services, its business relationships and its supply chain, actions taken to identify and track these impacts, and other adverse impacts which the undertaking is required to identify according to other EU requirements on undertakings to conduct the due diligence process; (iii) any actions taken by the undertaking, and the result of such actions, to prevent, mitigate, remediate or bring an end to actual or potential adverse impacts;
  • a description of the principal risks to the undertaking related to sustainability matters, including the undertaking’s principal dependencies on such matters, and how the undertaking manages those risks;
  • indicators relevant to the disclosures referred to in points (a) to (f)”.

While this objective is primarily focused on investors, it is also intended to inform all stakeholders of the company in a broader sense. Companies will have to have their sustainability reporting audited by an auditor or an independent certified expert to confirm that the information given by the issuer complies with the standards adopted by the EU. It is envisioned that EU member states will provide for minimum administrative measures and sanctions such as a public statement specifying the identity of the natural or legal person responsible and the nature of the infringement, an injunction to put an end to the conduct constituting the infringement and prohibiting it from being repeated, and administrative financial penalties.

The Directive provides for the elaboration of European standards for non-financial reporting and entrusts the European Financial Reporting Advisory Group (EFRAG), which advises the EC on the adoption of IFRS accounting standards, with their development. A first set of standards has been put out to public consultation until early August 2022. These standards will then be proposed to the Commission, which will adopt them in the form of delegated acts. Out of 13 sustainability standards, two of them deal with general principles, the other 11 cover environmental issues (climate, pollution, marine resources, water…), social affairs, governance, and business ethics. These standards will require the disclosure of about 100 indicators that will allow companies to evaluate and compare their environmental and social performance. It is intended to take into account the standards of the ISSB (International Sustainability Standards Board) which has been working on ESG risks informing investors.

These new obligations will come into force gradually, starting January 1, 2024 for companies already subject to the NFRD. For non-EU companies listed on EU regulated markets, the requirement to provide a sustainability report should be effective from January 1, 2025; for other third-country undertakings, from January 1, 2028.

Sustainable Finance Disclosure. European ESG disclosure requirements were also extended by the second component of the “Financing Sustainable Growth” action plan, the so-called SFDR of November 27, 2019, standing for “Sustainable Finance Disclosure Regulation”. Effective from March 2021, the SFDR requires EU investment funds and asset managers to disclose on their websites how they factor “sustainability risks” into their investment decision-making process and, according to the “double materiality principle” mentioned above, how they consider principal adverse impacts of investment decisions on sustainability factors. Large financial market participants (more than 500 employees) are even required to publish and maintain on their websites a statement on their due diligence policies with respect to the principal adverse impacts of investment decisions on sustainability factors. In this area also, France set a worldwide precedent with the August 17, 2015 Law on the energy transition for green growth (LTECV) and its corresponding decree of December 29, 2015, requiring asset management companies to be transparent about the inclusion of environmental, social and governance objectives in their investment strategies.

Taxonomy. The European Taxonomy Regulation, of June 18, 2020, establishes the world’s first-ever “green list”. First building block of the “Financing Sustainable Growth” action plan launched by the EC in March 2018, the new regulation, which became effective in January 2022, provides for a classification system (“taxonomy”) for sustainable economic activities, which requires NFRD companies to disclose the extent to which their sales, investments and/or expenditures are linked to activities defined in the EU taxonomy. Likewise, financial-market participants (such as asset managers) must now disclose the extent to which the activities funded through their financial products meet the EU Taxonomy criteria. The regulation thus makes it possible to share a common definition of sustainability and to reduce the risks of “greenwashing”. The EC adopted on June 4 and July 6, 2021, the text of two delegated acts clarifying the provisions of EU regulation. As of January 1, 2022, companies required to publish non-financial information, in particular European listed groups with more than 500 employees, will have to include in their report the information provided for by this regulation relating to activities considered as sustainable economic activities. It is thus based on rules for the classification of economic activities and rules on information imposed on financial actors and non-financial companies in relation to these activities. These provisions come into force progressively, as of January 1, 2022. It establishes, through its famous annexes by sector of activity, criteria to consider whether the economic activity contributes to “mitigation” or “adaptation” to climate change. The content and publication methods of the information to be provided have been amended by the delegated act of July 6, 2021. Even if those provisions will not apply directly to non-EU companies, the implementation could lead to a de facto necessity for companies in other jurisdictions to provide the same level of information otherwise they will face the pressure of their investors.

Due diligence requirements. In France, the Law of March 27, 2017 imposes an extensive “duty of vigilance” on large corporations: a legally binding obligation to implement a proactive plan to prevent serious injury to human rights and fundamental freedoms, to the health and safety of people and to the environment, which might result from company, subsidiary, supplier and subcontractor activities throughout the world.

The French duty of vigilance applies to all types of commercial stock corporations registered in France. A second precondition to being subject to the duty of vigilance is that, at the end of two consecutive financial years, at least 5,000 employees work for the company and its direct and indirect French-registered subsidiaries, or at least 10,000 employees work for the company and its direct and indirect French or foreign subsidiaries. Therefore, French subsidiary companies of foreign groups may fall within the scope of the Law through their own French and foreign subsidiaries, and thus be required to establish a vigilance plan for their own value chains. An exemption exists for companies controlled by a company already covered. There is no official record of such companies, which are estimated to number around 250. Perhaps influenced in turn by the European approach, a French parliamentary mission in February 2022 proposed redefining the scope of the French Law by lowering the employee thresholds and introducing an alternative trigger linked to turnover.

The qualifying companies are required to establish, implement and annually publish a vigilance plan, which must contain “reasonable vigilance measures suitable for identifying risks and preventing serious violations of human rights and fundamental freedoms, the health and safety of individuals, and the environment”. According to an amendment introduced by the Law of August 22, 2021 “on combating climate change and strengthening resilience to its effects”, “for companies producing or marketing products from agricultural or forestry operations, this plan includes, in particular, reasonable vigilance measures to identify the risks and prevent deforestation associated with the production and transport to France of imported goods and services”. These serious harms, which are not defined in the act, may result from the national or international activities of the company and of its subsidiaries, but also of subcontractors and suppliers with whom an “established business relationship” is maintained if this relationship is related to the activities in question. The vigilance plans must include at least five elements: a mapping that identifies, analyses and ranks risks; an assessment procedure for subsidiaries, subcontractors or suppliers with whom they have an established business relationship; appropriate actions to mitigate or prevent serious risks; a whistleblowing mechanism to issue alerts and obtain reports concerning such risks; and a system to monitor and evaluate the efficacy of these measures.

Regarding sanctions, the Vigilance Act originally included civil penalties of 10 or 30 million euros for non-compliant companies. These penalties were declared unconstitutional by the French Constitutional court, however, in a decision dated March 23, 2017, ironically because they were found to be in violation of the French Declaration of human rights, since the terms of the offences were too vague and general to sustain sanctions of a punitive nature. Therefore, only civil measures are available. Thus, when a company is given notice to comply with the due diligence obligations and fails to do so within three months from the date of the notice, the judge may, at the request of any person having an interest in the matter, enjoin the company to comply with the obligations, subject to a penalty if necessary. As far as we know, only ten letters of formal notice have already been issued and made public. As for post-harm claims, a breach of the company’s duties regarding its vigilance plan entails liability and requires the company to remedy any harm that the execution of these duties could have prevented, which is no more than the application of general tort law.

Inspired by the French model and building on national recent experiences in Germany or Norway, the European Commission is trying through its 2022 proposal on CS3D to develop a more inclusive, elaborate and better-enforced due diligence legal regime. The objective is to require companies to identify, assess, prevent, report, address and remedy potential or actual adverse effects on human rights, the environment and good governance in their value chain. The scope is mainly focused on human rights and the environment as reflected in a long list of international conventions.

The Directive would, firstly, be applicable to EU companies – mainly defined by their legal forms (joint-stock corporations and LLCs), except for regulated financial entities – that have more than 500 employees on average and a net worldwide turnover of more than EUR 150 million (group 1); or more than 250 employees and a net worldwide turnover of more than EUR 40 million, provided that at least 50% of this net turnover was generated in one or more sensitive sectors (e.g. manufacture of textiles, agriculture, fisheries, food products, extraction of mineral resources) (group 2). The Directive would also be applicable to third-country companies of a comparable legal form with a net turnover of EUR 150 million in the Union (group 1) or of EUR 40 million, provided that at least 50% of their net worldwide turnover were generated in one or more of the above-mentioned sectors (group 2). The choice of a criterion related to turnover generated in Europe is rationalized by the fact that it ensures a sufficient territorial connection with the EU, which is necessary according to general EU law and probably also to WTO law. This personal scope of application should not be confused, however, with the territorial scope of the due diligence duties of the covered companies. While the former is by nature European, the latter is by nature global. If the proposal is silent on this point, subjecting non-EU companies to due diligence obligations to value chains unconnected to the EU risks running up against the requirements of WTO law.

In contrast to French law, the wording of the proposal seems to indicate that the number of employees and net turnover thresholds are to be calculated company by company, and not at group level.

More in line with the 2011 UN Guiding Principles on Human Rights, the 2011 OECD Guidelines for Multinational Enterprises and the 2018 OECD Due Diligence Guidance for Responsible Business Conduct, the 77 page-long CS3D proposal would principally require Member States to ensure that the covered companies “conduct human rights and environmental due diligence”, which includes 7 basic elements (Article 4): 1) a “due diligence policy”, updated annually (Article 5); 2) the identification of actual or potential adverse impacts (Article 6); 3) the prevention and mitigation of “potential adverse impacts” (Article 7); 4) the minimization of the extent of “actual adverse impacts” (Article 8); 5) the establishment of a “complaints procedure” (Article 9); 6) the monitoring “the effectiveness of their due diligence policy and measures” (Article 10), through periodic assessments at least every 12 months; 7) a public reporting (Article 11). The proposal seeks to clarify some of the new obligations by way of delegated acts, of voluntary “model contractual clauses” developed by the Commission or more broadly by way of guidelines.

Besides these general due diligence duties, the CS3D (Article 15) would require the largest EU and non-EU qualifying companies (group 1) to “ensure” that their business models and strategies are “compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement”; to include “emission reduction objectives in its plan”, “in case climate change is or should have been identified as a principal risk for, or a principal impact of, the company’s operations”; and to duly take into account the fulfilment of these two obligations “when setting variable remuneration, if variable remuneration is linked to the contribution of a director to the company’s business strategy and long-term interests and sustainability”. While the European obligation is intended to provide a substantive basis for the disclosure requirement present in the forthcoming CSRD, a literal reading of its strict requirements contrasts with the means-based due diligence requirements. Indeed, it seems to lead to a meta-obligation with respect to climate impact results, exceeding what the Paris Agreement actually requires, which would condition the legal and economic survival of each subject company. Undoubtedly, Article 15 will attract much attention and criticism, as what could be an unconditioned “death-penalty” sanction may appear disproportionate and therefore legally questionable with respect to the freedom of enterprise protected by the Charter of fundamental rights of the European Union and the many Member States’ constitutions.

With regard to sanctions, a combination of penalties and civil liability is provided for. Each EU member state will have to designate one or more supervisory authorities to monitor compliance. In deciding whether to impose sanctions and in determining their nature and appropriate level, due account will be taken of the efforts made by the company to comply with any remedy imposed on it by a supervisory authority, any investments made and targeted support provided, as well as collaboration with other entities to address negative impacts in its value chains. Where financial penalties are imposed, they shall be based on the turnover of the company. EU member states will ensure that companies are held civilly liable for damages if they have failed to comply with obligations and as a result of such failure, an adverse impact has occurred that should have been identified, avoided, mitigated, eliminated or minimized by appropriate measures and has resulted in damages. Of minimum nature, these rules would be, however, of “overriding mandatory application in cases where the law applicable to claims to that effect is not the law of a Member State.”

III. What are the recent developments that suggest that additional ESG developments are still possible in the short term in France and to be extended at the European and global levels?

In recent years in Europe, debates have been oriented towards climate issues. The Covid-19 crisis and the war in Ukraine have not affected the will to continue along the path of reform with social developments on the objective of a fairer sharing of value within the company.

The ESG ecosystem. The implementation of ESG standards is leading to the gradual establishment of an ecosystem with a significant increase in the number of people dedicated to ESG in companies and a concentration of the non-financial rating market, with the ESG analysis and investment recommendation market growing exponentially. In this respect, the use of data processing solutions provided by technology for analysis has significantly assisted analysts in these areas. The latest advances are even spectacular and any company hoping to take refuge behind the absence of serious data will soon face difficulties. Green Tech will definitely be at the service of ESG and developments in Agri-Tech now allow to provide information to understand the impact of every company on every piece of land.

Putting ESG into practice. In addition to the changes already made, in the coming months we can anticipate discussions on shareholders’ “Say on Climate”, on accounting standards and the consideration of environmental impact in the accounts, or even a thorough harmonization of ESG rating criteria. Moreover, these developments will undoubtedly lead to an increase of directors and management liability. A capitalism system that pretends to be responsible should obviously be ready to face responsibility. Today, many companies no longer have to deal with classic shareholder activism, but with ESG or green activism by stakeholders who may opportunistically use the rights of shareholders in “one share” campaigns, which managers and boards of directors should anticipate.

Mission-led companies. In France, the adoption of the newly created label société à mission (company with a mission) is the next step after the adoption of a raison d’être. This option allows any company to adopt this new label if it satisfies the following five conditions: 1° It has a raison d’être defined in its bylaws; 2° Its bylaws include a mission, i.e. social and environmental objectives in accordance with its raison d’être. Here we find the triple bottom line – people, planet and profit – that characterizes the structure of the US benefit corporation. The definition of the raison d’être is in turn constrained by a social and environmental orientation; 3° Its bylaws specify the procedures for monitoring the performance of this mission. These procedures provide that a mission committee, separate from the corporate legal bodies and having at least one employee, is exclusively responsible for this monitoring and submits an annual report attached to the management report, to the meeting responsible for approving the company’s accounts. This committee would carry out any audit it deems appropriate and be provided with any documents necessary to monitor the performance of the mission; 4° The execution of the social and environmental objectives is subject to verification by an independent third-party body, according to procedures and publicity defined by decree in the Council of State. This verification would give rise to an opinion attached to the report referred to in 3°; 5° The company declares its status as a mission company to the clerk of the Commercial Court, who publishes it. Unfortunately, contrary to the US benefit corporation, there is no presumption nor guarantee in the law that directors and managers of a société à mission will be reputed to be acting in the company interest while pursuing the company’s mission.

Among the SBF120 companies, only one (Danone) has a “mission” label. Of all the French listed companies, four have a mission. In total, by September 2021, there were about 300 French sociétés à mission, which represents more than a quadrupling in one year. 70% of them are companies with fewer than 50 employees, relatively young, largely Parisian and operating in the service sector. True to its guiding ambition, the French government nevertheless intends to promote this legal status on a European scale.

The sharing of value within the company. In France, the latest initiatives indicate that trends are evolving towards the sharing of value within the company and that these debates will be elevated by France and at the European level to a reinforcement of profit sharing and incentive agreements with employees, which are intended to “reconcile” work and capital. These schemes associate employees with the performance of their company through the payment of a part of the company’s results (in the case of profit sharing), or of a bonus related to its performance (in the case of incentive agreements). They are typical tools of French capitalism, which was founded not on retirement by capitalization but by distribution and intergenerational solidarity. At a political moment when Emmanuel Macron has been re-elected as President, France is grappling with the sensitive issue of purchasing power that already gave rise to the yellow vests movement, there is no doubt that trends on value sharing will be one of the major subjects in the short term and that this subject will have a European resonance. Asia and the United States are therefore aware of the future issues that will arise in the next few years and if they have activities in Europe, even if it is only a market for them.

IV. Why are France and Europe embarking on these paths of capitalism evolution?

A moral issue. The evolution of capitalism is not driven by a scientific or utilitarian conviction that companies with a good ESG rating perform better financially. Nor is it inspired by a political agenda that could be attributed to the left/right or conservative/progressive wing. The major driving force is a moral one and a conviction that capitalism must evolve responsibly.

The subprime crisis, the alleged financialization of the economy, and climate issues, have all given rise to debate regarding how much capitalism and its actors should adapt. A few reports have initiated and enhanced this discussion. Through its political leaders, following their precursors, France is animated by an inner ambition to advance the idea of a “renewed capitalism”.

We must remember that in the 19th century, France had a paternalistic business model of responsibility. Company leaders considered themselves to have a natural social responsibility, being aware that through their activity they had duties towards their employees and families. Subsequently, a French social model was established around the notion of solidarity, including generational solidarity, and the distribution of the wealth produced between employees, managers and shareholders according to the principle of collective bargaining.

Some would say that from the 1980s onwards, the model was left aside in favor of globalization, with the opening up of markets and the universal competition which led to new shareholding structure. In this new world, the ideology of individual responsibility would have replaced that of social responsibility. Corporate responsibility was then deployed around two major issues that raise the question of the limits of freedom: “the question of externalities and outsourcing, on the one hand (for example, the environment or the limit of outsourcing of social issues), and on the other hand, the prohibition of practices that potentially ruin capitalism by abolishing trust (fraud, truthfulness of accounts)”.

Responsible capitalism is self-evident. What characterizes ESG is that responsibility is no longer thought of as an exclusively social element, but also as a component of governance and the environment. Social responsibility, under American influence, becomes the protection of “human rights” (diversity, inclusion, etc.). Companies are then invited to define their social/societal responsibility, which must integrate the interests of all their stakeholders. Environmental responsibility can also be conceived as a human right, that of living in a healthy and sustainable environment, although some wish to give it a metahuman value.

Derived from the idea that if the largest companies participate in the problems, it is logical that they participate in the solutions. Not all companies are equal, the responsibility of the largest includes those that depend on them. This is how social issues become societal and the responsibility of companies expands. This is what some call responsible capitalism.

Some will criticize this new capitalism for its lack of realism or will accuse the managers of large companies of seizing power to avoid being accountable to their shareholders. Those who have economic history in mind will see in these new demands for the imposition of civic virtues on companies, the end of a doctrinal and regulatory cycle centered on shareholder primacy. To understand this move to a new capitalism, however, it should be kept in mind that in Europe, banks dominantly finance the economy, contrary to the United States, where the most important source of financing is the savings allocated to retirement and reinvested by the capital markets. The role of capital markets is strengthened in the United States, whereas this is not the case in Europe and these issues are less debated because the share capital of European companies is more controlled.

Nevertheless, it remains important to understand that, if managers generally take the initiative to move in a new direction, it is generally under pressure from their customers, employees and even shareholders. In reality, the consumer is a “consumer-actor” who demands that carbon emissions, pollution, diversity, and disability issues be addressed within the company. The shareholders themselves understand this necessary evolution that are imposed on the company by its stakeholders and sometimes even amplify them. The State itself is under media pressure in its spending choices (orders or public aid) and consideration for the society and the environment.

More than a mere choice, ESG has become an issue that is imposed on all actors, even beyond companies, since the matter concerns us all, from individuals to States.

The complete paper is available for download here.

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