Responsible finance: how European regulations are charting a favorable course
In early 2023, the European Union (EU) adopted the Corporate Sustainability Reporting Directive (CSRD), which strengthens sustainability reporting requirements for companies and gradually expands its scope (fiscal years 2024 to 2028).
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Pierre Chollet, University of Montpellier; Nicolas Cuzacq, University of Paris-Est Créteil Val de Marne (UPEC) and Souad Lajili Jarjir, University of Lorraine
The main objective of the CSRD is, as emphasized by the Autorité des marchés financiers (AMF), "to harmonize corporate sustainability reporting and improve the availability and quality of published environmental, social, and governance (ESG) data." In a speech delivered in June 2022, the former president of the AMF stated that this directive constituted:
" The heart of the sustainable finance reactor."
An ambitious directive
The directive aims to provide financial actors with the information they need both to meet their own reporting obligations and to carry out their activities.
The current limitations are well known to institutional investors and fund managers who are required to publish their own sustainability information: there is a lack of consensus on the definition of impact measures and on the accessibility and comparability of data.
In order to achieve its objective, the directive relies on three key changes in the disclosure of non-financial information. First, it stipulates that:
"Companies will have to publish detailed information on their risks, opportunities, and material impacts related to social, environmental, and governance issues, according to a principle of 'double materiality.'"
Thus, two perspectives are considered: that of risks to the company and that of the company's impact. The dissemination of this information will enable financial players to prepare their reports in terms of "double materiality": the financial effects of ESG criteria on portfolios and the impact of portfolios on ESG areas.
This is consistent with the obligation, set out in the Sustainable Finance Disclosure Regulation (SFRD) of November 27, 2019, to take into account the main negative impacts on sustainability in relation to financial products (contribution to climate change, damage to biodiversity, water pollution, gender discrimination, etc.).
The second change is that the CSRD introduces another measure to promote transparency with the creation of mandatory disclosure standards for sustainability reporting. Previously, companies enjoyed considerable freedom, as the EU merely proposed voluntary guidelines. From now on, the European Commission will select mandatory indicators based on proposals from the European Financial Reporting Advisory Group (EFRAG), a non-profit association incorporated under Belgian law. This system will need to demonstrate its resistance to lobbying and avoid creating an administrative burden for companies.
A head start for France
Finally, the third major change is that the CSRD directive stipulates that sustainability reporting information will now be audited. The regulation tightens up the previous law, as the previous directive left it up to each Member State to make such audits mandatory. On this point, France had introduced such an audit as early as 2010, in the so-called Grenelle 2 law, with the figure of the independent third party (OTI). As a result, French companies and auditors now have source experience and a comparative advantage at the European Union level.
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In order to give European companies time to adapt to the new legislation, the auditor will initially carry out a limited engagement. Then, by 2028, the EU's objective is to move to an engagement that involves more validation testing by the auditor.
The absence of mandatory auditing was one of the original flaws in the 2014 directive, as stakeholders were unable to compare audited reports with those that were not. This shortcoming could lead to selection at the expense of virtuous companies whose weaknesses were highlighted. Corporate social responsibility (CSR) law must expose companies that are merely paying lip service to the issue.
Ultimately, the work of European legislators in recent years has paved the way for responsible finance that aims to meet society's new aspirations in terms of environmental, social, and governance requirements. The objectives are far from being achieved, as these measures need to be made more operational for companies and investors. Furthermore, it is important to place this work within a global vision to prevent the European continent from becoming like a Gallic village!
Pierre Chollet, Professor Emeritus, Montpellier Management, Montpellier Research Management (MRM), University of Montpellier; Nicolas Cuzacq, Senior Lecturer, Private Law and Criminal Sciences, University of Paris-Est Créteil Val de Marne (UPEC) and Souad Lajili Jarjir, Associate Professor of Management Sciences, University of Lorraine
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