More Sustainable Finance: Self-Regulation for Businesses with Smart Law
RULES OF THE GAME - Finance, CSR, Ethics

More Sustainable Finance: Self-Regulation for Businesses with Smart Law

Recommendations

Legislators are getting increasingly involved in CSR (corporate social responsibility) and putting in place legally binding measures that are sometimes out of step with economic reality. There is still time for economic agents to demonstrate their ability to self-regulate by developing smart law.

We recommend that economic agents:

  • Set CSR expectations adapted to their issues, particularly sectoral ones.
  • Choose the most relevant non-financial indicators on which to express themselves and be evaluated.
  • Voluntarily put in place a committed, standardised and digitalised non-financial reporting framework, for example with the help of new measurement tools.

The Covid-19 crisis invites us to be more measured and prudent

On 15 March 2020, the world moved into a new era as a global lockdown loomed. Once the initial shock had passed, it became clear that we needed to think about how to transform our way of life. Finance did not escape this fundamental shift and today, a consensus has developed: conventional finance needs to be complemented by sustainable finance. “We generally understand sustainable finance to mean investments made in socially responsible products.” Socially responsible investment (SRI) was initially focused on the environmental angle, with green funds for example. Today, it is defined as investments made by institutional or individual investors who take social, environmental and ethical considerations into account in their investment decisions.

The message had been clear ever since the last crises

Back on 24 November 2008, Gérard Mestrallet, Chairman of Europlace, said during a Forum, “We are all convinced that our financial system needs to be overhauled. This is fundamental for the future of the French and European economy. We need collective action, centred on Paris Europlace, in favour of sustainable finance.” Similarly, during his inaugural address in January 2009, President Obama said, “We have now reached a point of profound irresponsibility… For decades, too many people on Wall Street have speculated rashly, focusing on financial gains with blind optimism and little regard for the serious risks and even less respect for the public good… These people have forgotten that markets work better when there is transparency and compliance…”

There is today a consensus around the need for a deep and rapid paradigm shift. 

Sustainable finance returns to serve the needs of a responsible future

Sustainable finance is not a new concept. Its roots lie in the Jewish, Christian and Muslim religious communities which prohibited certain activities such as investing in pornography, alcohol or gambling. Ethical investing began to emerge when money started to be used for moral purposes. From the 17th century, members of the Quaker religious movement in North America played both a financial and an active role in combating violence, slavery and piracy. Continuing in this vein, in the 18th and 19th centuries Methodists focused on supporting the needy by developing social services. They banned investments in the sale of alcohol, tobacco, weapons and games of chance. During the second half of the 19th century, mutual funds grew up out of a set of values that placed the individual and social development at the heart of all activities.

During the 20th century, and more precisely in the 1960s, the approach became secular rather than religious and the notion of socially responsible investing (SRI) appeared. 

In this context, notions of sustainable development, social and societal responsibility have become a central focus of entrepreneurial development. This has not gone unnoticed by French lawmakers, who are taking a greater and greater role in controlling governance and responsible investment practices.

The position taken by French lawmakers

Over approximately the last forty years, economic agents have seen obligations on them to produce and publish non-financial information mushroom. Company directors are bound by more and more social and environmental criteria. These now cover all domains. The notions of socially responsible investing (SRI) and corporate social responsibility (CSR) are now indissociable and intrinsically linked to the development and growth of businesses.

Since the early 1980s in particular, following the Chernobyl nuclear catastrophe and the Exxon Valdez oil spill, French lawmakers have made sustainable development a central focus of entrepreneurial development.

The first such law was that of 1977 (law no.77-769 of 12 July 1977 on the social balance sheet), which required companies and sites with more than 300 staff to produce a social balance sheet.

Over approximately the last forty years, economic agents have seen obligations on them to produce and publish non-financial information mushroom. Company directors are bound by more and more social and environmental criteria. These now cover all domains. The notions of socially responsible investing (SRI) and corporate social responsibility (CSR) are now indissociable and intrinsically linked to the development and growth of businesses.

Since the early 1980s in particular, following the Chernobyl nuclear catastrophe and the Exxon Valdez oil spill, French lawmakers have made sustainable development a central focus of entrepreneurial development.

The first such law was that of 1977 (law no.77-769 of 12 July 1977 on the social balance sheet), which required companies and sites with more than 300 staff to produce a social balance sheet.

The next stage came in 2001 with the passing of the new economic regulations, or NRE, law (no. 2001-420) which required listed companies to publish social and environmental information.  In 2010, following the Grenelle environmental round table (Grenelle law 1 no. 2009-967 of 3 August 2009 and Grenelle law 2 no. 2010-788 of 12 July 2010) this obligation was extended to unlisted companies over a certain size. The list of indicators was considerably extended, especially in regard to societal information.

To add to an already burdensome set of requirements, ordinance no. 2017-1180 of 19 July 2017 and its enforcement decree no. 2017-1265 of 9 August 2017 transposing into French law directive no. 2014/95/EU of 22 October 2014 added a requirement to disclose non-financial information for listed companies, and unlisted companies larger than the thresholds set in the decree of 9 August 2017 (Commercial Code, art. R. 225-104, para. 2). This ordinance brought a sea change to French law in this field, as it introduced for the first time a transparency obligation regarding non-financial information. However, at this stage, it was purely an order to communicate information. Members of the governance and supervisory bodies were not held collectively responsible in the event of an omission. Moreover, as Cusacq quite rightly points out: “an order to communicate does not resolve the issue of incomplete or misleading declarations”.

Lastly, law no. 2019-486 of 22 May 2019 for business growth and transformation, known as the Pacte law, added to article 1833 of the French Civil Code a second paragraph which states that “the company is managed in its corporate interest and in taking into consideration the social and environmental issues related to its activity”. In doing so, it introduced issues that fall under the umbrella of corporate social responsibility. This addition is both original and fundamental because, as Desbarats quite rightly says: “it cements the legal recognition of a social purpose specific to the structure, separate from that of the directors, the employees or the business, but also a modernised vision of this interest because it is extended to encompass concerns beyond the strict financial sphere, which can no longer be reduced purely to profit.”

The danger of growing interventionism by lawmakers in the CSR field: Hard Law and Soft Law

As one reform follows another, the transparency obligation has continually developed in a binding form, as Hard Law. Some authors speak, justifiably, of information overload. Between a company’s social balance sheet, which can include more than 200 indicators, each containing up to 10 pieces of data, its management report, an often-weighty document dedicated to non-financial reporting (containing environmental, societal and social information), and its CSR report which can be up to 100 pages long, information sometimes lacks clarity. Elements may repeat or contradict one another. It is difficult for readers to form a clear picture of the real situation. The key challenges may become lost in the mass of information.

In contrast to this, there is another vector, Soft Law, which originates from a desire to self-regulate expressed most strongly by business unions such as MEDEF.

As Portalis wrote, “The law is an expression of reason, and is similarly general in scope, impersonal and permanent.” At the very least, it appears ill-suited to supporting businesses in their CSR approaches, which are logically assumed to be based on a legal entity voluntarily taking into consideration the social and environmental issues in its sector of activity. Each company is different, with its own characteristics. Putting in place a single blanket rule for all companies, regardless of size, industry or specificities risks being counterproductive on both an economic and a social and societal level. In this domain, nuance is indispensable. Binding legal requirements do not therefore appear to be the most appropriate instrument for implementing CSR standards in a harmonious way.

Soft Law could however be an avenue to explore, in that it is better placed to meet stakeholders’ expectations in this area.   

This law is based not on rules laid down externally (by lawmakers) but on obtaining the buy-in of those involved and making them aware of their responsibilities, in particular by involving the players in setting the objectives to achieve and securing the engagement of protagonists. The effectiveness of these rules will be judged according to the proportion of players that voluntarily commit to them.

Putting in place a smart law to move towards positive integration of CSR rules

So as we have seen, the heavy burden of Hard Law often proves counterproductive, and encourages us to consider developing other options for integrating CSR into businesses, by concentrating on self-regulation. This would be achieved by putting in place a commitment-based, standardised non-financial reporting framework adapted to the specific issues in each of the businesses involved, which would be free to choose the indicators on which they would be held to account. We could call this Smart Law. This approach would consist in setting firm targets to which companies would commit themselves via digitalized and traceable financial and non-financial reporting.

Although the laws in place are increasingly numerous and detailed, they remain relatively measured and are not particularly compelling, especially in terms of sanctions. But it is unfortunately likely that lawmakers will continue to extend their interventionism if company leaders fail to consider these criteria, vital as they are to establishing responsible governance. Although the legislative stranglehold seems to have tightened in the field of CSR over the last few years, there is still time for economic agents to demonstrate their sense of commitment and their ability to self-regulate.