Responsible finance: how European regulations are shaping a favorable trajectory

In early 2023, the European Union (EU) adopted the so-called "CSRD" (Corporate Sustainability Reporting Directive), which strengthens corporate sustainability reporting requirements and gradually expands their scope (fiscal years 2024 to 2028).

Pierre Chollet, University of MontpellierNicolas Cuzacq, Université Paris-Est Créteil Val de Marne (UPEC) and Souad Lajili Jarjir, University of Lorraine

The main aim of the CSRD is, as the Autorité des marchés financiers (AMF) points out, "to harmonize companies' 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 chairman of the AMF described the directive as :

" The reactor core of sustainable finance ".

An ambitious directive

The aim of the directive is to provide financial players with the information they need both to meet their own reporting obligations and to conduct their business.

The current limitations are well known to institutional investors and fund managers who have 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 introduces three key changes to the publication of non-financial information. Firstly, it stipulates that :

"Companies will have to publish detailed information on their material risks, opportunities and impacts in relation to social, environmental and governance issues, according to a "double materiality" principle".

In this way, two points of view are considered: that of the risks to the company and that of the company's impact. The dissemination of this information will enable financial players to draw up 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 November 27, 2019 "SFRD" (Sustainable Finance Disclosure Regulation), to take into account the main negative sustainability impacts at the level of financial products (contribution to climate change, damage to biodiversity, water pollution, gender discrimination, etc.).

Second change: the CSRD directive introduces another transparency-friendly measure, with the creation of mandatory information standards for sustainability reporting. Previously, companies enjoyed considerable freedom, as the EU merely proposed voluntary guidelines. From now on, the European Commission will select the mandatory indicators on the basis of proposals from the European Financial Reporting Advisory Group(Efrag), a non-profit association incorporated under Belgian law. This system will have to demonstrate its permeability to lobbies and avoid an excessive administrative burden for companies.

A step ahead for France

Last but not least, the third major change introduced by the CSRD directive is that sustainability reporting information will henceforth be audited. The regulations tighten up previous legislation, as the previous directive left it up to each Member State to make such an audit compulsory. On this point, France had already introduced such an audit in 2010, in the so-called Grenelle 2 law, with the figure of the independent third-party organization (OTI). As a result, French companies and auditors now have a wealth of experience and a comparative advantage throughout the European Union.

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To give European companies time to adapt to the new legislation, the auditor will initially carry out a limited assignment. Then, by 2028, the EU's aim is to move to an assignment involving more validation tests on the part of the auditor.

The absence of a mandatory audit was one of the original flaws of the 2014 directive, as stakeholders could not compare audited reporting with unaudited. This shortcoming could lead to a selection to the detriment of virtuous companies whose certain weaknesses were brought to light. The law on corporate social responsibility(CSR) must unmask companies that play a charade of appearances.

In short, the work of the European legislator over the past few years has enabled us to chart a course for responsible finance that aims to meet society's new aspirations in terms of environmental, societal and governance requirements. The objectives are far from being achieved, however, as we need to make these measures easier to implement for companies and investors alike. What's more, it's important to place this work within a global and global vision, to avoid the European continent ending up like a Gallic village!

Pierre Chollet, Professor Emeritus, Montpellier Management, Montpellier Research en Management (MRM), University of MontpellierNicolas Cuzacq, Senior Lecturer HDR, Private Law and Criminal Sciences, Université Paris-Est Créteil Val de Marne (UPEC) and Souad Lajili Jarjir, Associate Professor of Management Sciences, University of Lorraine

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