ESG Legal: in the minds of investors (Part 1)

29 March 2024
Jacques Perotto

ESG has become an unavoidable factor in investment that can nevertheless be “avoided”. This is the paradox for companies that are committed to social responsibility, but whose social “window-dressing” does not always reflect the reality of the commitments they have made.

Faced with this dilemma, what are the expectations of those who hold most of the decision-making power in terms of the impact of ESG? What do investors see as their role in participating in climate transition, and how will they convey their expectations of companies?

There are many questions to be answered, starting with the key issue of corporate governance.

The sustainability of the decisions taken by a company is a reflection of the governing bodies from which they emanate

The struggle against greenwashing is often first and foremost reflected in the presence of governing bodies set up to enable the deployment of strategy for economic performance. Such a strategy incorporates the constraints associated with the ecological and social transition, with the idea that the sustainable transformation of the company helps both to enhance it as well as to optimise its financial value.

The European legislator has always taken the view that the “E” for Environmental and the “S” for Social are necessarily correlated with the “G” for Governance, whose bodies must instil the reality of the commitments made in terms of environmental transition.

In France, the AFEP-MEDEF Code, conceived by the employers’ union, introduced the idea that the “quality” of any board of directors should be assessed on the balance of its membership. At the European level, the 12th cross-sectoral Technical Standard RS, G1 Business Conduct stipulates that companies must disclose information on the composition, diversity and expertise of their boards of directors: gender, age, nationality, qualifications, expertise, experience, independence of directors, representation of employees, shareholders, the role given to stakeholders and the setting up of specialised diversity committees.

In English-speaking countries, employees are generally not involved in corporate governance and therefore do not have access to the boards, supervisory or auditing bodies. The German and French models draw their inspiration from a participative approach, with representation on boards.

Dedicated governing bodies

In France, the AFEP-MEDEF Code recommends that the remit of audit committees should no longer be limited strictly to purely financial and accounting considerations, but should be extended to include extra-financial and therefore sustainability considerations. For example, the audit committee’s review of the financial statements should be accompanied by a presentation by management of an analysis of the company’s exposure to social and environmental risks.

The French Financial Markets Authority (AMF) considers that, in the absence of a CSR committee, it is up to the Board of Directors to explain how it intends, for example, to take account of the social and environmental issues facing the company. As of 2023, all CAC 40 companies have a CSR committee.

According to the AMF, the CSR committee’s task is to assess the risks and opportunities associated with taking CSR issues into account in the company’s economic performance. Similarly, the AMF considers that directors’ CSR skills are a key factor in the sustainable functioning of boards of directors, and that the appointment of a CSR lead director is a convincing indicator that the board has taken into account the issues associated with the environmental and social transition.

The need for Boards of Directors to take into account social and environmental issues in its policy decisions

The inclusion of stakeholders (customers, principals, NGOs, consumers, employees) in corporate governance bodies is a first guarantee of the company’s transparency with regard to its sustainability commitments.

However, article L.225-35 of the French Commercial Code now specifies that these decisions must be taken in the company’s social interest, taking into account social, environmental, cultural and sporting issues[1]. This means that companies must no longer limit themselves to serving the interests of individuals (or their shareholders).

Implementing a working methodology based on sustainability

Taking CSR issues into account when defining strategy involves identifying and analysing the demands of the market and stakeholders by :

– mapping the CSR risks associated with the company’s activities in order to determine the positive and negative consequences of its CSR activities, as well as the impact of the environment on the company’s activities;

– prioritising the issues at stake in order to justify certain decisions;

– drawing up a strategy for different time frames, taking into account a risk analysis grid, as well as the impacts and opportunities in each of the company’s sectors of activity;

– the introduction of CSR performance indicators.

In conclusion, there are many indicators that allow us to measure the degree of sustainable commitment from each governing body in an increasingly concrete way.