France: The View From France

Listed companies in France have long been subject to reporting and disclosure requirements designed to promote corporate social responsibility and, more recently, sustainable growth and sustainable finance, in the interests of shareholders and stakeholders. Since the implementation of the 2014 EU Non-Financial Reporting Directive (NFRD) into French law in 2017, only large companies listed on the regulated Euronext Paris market have been obliged to publish nonfinancial information (in a statement included in the management report) and information on their diversity policy as it applies to the board of directors. There have also been a number of other national legislative obligations covering gender representation and equality.

In light of the EU Corporate Sustainability Reporting Directive (EU) 2022/2464 (CSRD) (see pg 6 for more details), which amends and significantly enhances companies' reporting requirements under the NFRD, plus several other EU directives, there is currently intense interest and debate on how these directives, which will be implemented no later than 2024, will further affect companies and investors in France.

The CSRD extends the scope of the companies covered by the NFRD to all large and all listed companies, requires the audit of reported information, and strengthens the standardisation of reported information in line with soon-to be adopted European Sustainability Reporting Standards (ESRS) to foster the publication of quality and comparable environmental, social, and governance (ESG) data.

Existing Disclosure Requirements and Extra-Financial Reporting

France has well-established good market practices that integrate sustainability issues and concerns, not least because first corporate social responsibility (CSR), then ESG considerations have already been integrated into commercial and civil law. Article 1833 of the French Civil Code was amended in 2019 to note that a company must be "managed in its own corporate interest, taking into consideration social and environmental issues related to its business operations."

CSR reporting became integral to French commercial, environmental, and employment law as a result of the implementation of the NFRD. Companies listed on regulated markets, such as the more than 800 companies listed on Euronext Paris, have therefore been required since 2013 to publish information related to environmental matters; social matters and the treatment of employees; human rights; anti-corruption and bribery; board diversity (in terms of age, gender, educational, and professional background); and the compensation policy for corporate officers. This CSR information is disclosed in the annual management report, in the corporate governance report, or, with respect to large companies, in the mandatory corporate governance statement.

Under the "comply or explain" principle, listed companies that adhere to a code of corporate governance (French issuers may refer to the AfepMEDEF or Middlenext codes) can either: i) comply with its recommendations, most notably to create a CSR committee (with a role to play on "say on climate" resolutions), establish ESG training for board members, and ensure fairness and gender balance at all levels; or ii) explain why these actions haven't been undertaken. Since 2021, large companies have been under a legal obligation to take measures to achieve a balanced representation of men and women at board and/or executive level.

Having identified sustainable finance as a priority in 2010, the French financial markets authority (AMF) actively monitors the information provided to investors. This includes information provided by companies on their strategies for combating climate change; information relating to the classifications introduced by the Sustainable Finance Disclosure Regulatio n ((EU) 2019/2088) (SFDR), (see pg 9 for more details), the main provisions of which started to apply in March 2021; and information produced in periodic reports under disclosure requirements implemented in January 2022.

In a recent report, the AMF suggests that, while equity funds promoting sustainable characteristics (Article 8 of the SFDR) and pursuing a sustainable investment objective (Article 9) have a lower exposure to fossil fuel industries than funds without a sustainability scope (Article 6), Article 8 or Article 9 bond funds have, counterintuitively, a higher exposure to fossil fuel industries than their Article 6 equivalents. This may have to do with the fact that these bonds have a higher proportion of green bonds or sustainability-linked bonds in their portfolio.

Extended Disclosure and Reporting Under the CSRD

The existing mandatory disclosure regimes and reporting requirements under French law are expected to be amended based on the provisions of the CSRD, the SFRD (which applies until the CSRD is implemented), and the EU 2020 Taxonomy Regulation.

As the EU Commission's principal mechanism to address "greenwashing", the Taxonomy Regulation (see pg 9 for more details) sets out criteria for determining if an activity is environmentally sustainable, including whether the activity contributes to, or does not significantly harm, one or more specified environmental objectives. The Taxonomy Regulation, effective since January 2022, requires further disclosures in addition to those set out in the SFDR.

All companies listed on the regulated market (except micro-companies) will be under more stringent and harmonised reporting obligations in order to improve the availability and quality of ESG disclosures. Under the principle of "double materiality"-how the business is impacted by sustainability issues and how the business' activities impact society and the environment-companies will have to report detailed information on their material sustainability risks, opportunities, and impacts under the ESRS.

Listed companies will also have a substantive duty to undertake due diligence to identify, prevent, mitigate, and account for external harm resulting from adverse human rights and environmental impacts caused by the company's own operations, its subsidiaries, and in the value chain. It is the responsibility of corporate directors to implement sustainability due diligence.

The extra-financial performance statement will be replaced with the "sustainability" report, which will be made according to the ESRS and will include materiality assessments, carbon footprint reduction measures, environmental impact reduction, and ESG forward-looking statements.

Sustainability information will be located in a dedicated section of the issuers' mandatory management report. Companies will have to prepare their reports, including the sustainability statement, in an xHTML electronic format. The sustainability information will also have to be marked in accordance with a to-be-adopted digital taxonomy to enable compatibility with the forthcoming European Single Access Point, and will be audited by statutory auditors or independent assurance providers under European and sustainability assurance standards.

The Impact of Enhanced Disclosure and Reporting

In a bid to accelerate the transition to new investment standards, Euronext has launched the Eurozone ESG Large 80 Index, which is designed to identify companies with the lowest governance ratings (such as those doing business incompatible with the UN Global Compact or involved in coal, tobacco, or controversial weapons), and the 80 most virtuous companies in terms of energy transition within their respective sectors.

As a result of the wealth of information being generated by the many new reporting obligations, and the obvious commercial advantages inherent in being seen from doing "good" business, France has an increasing number of third-party impact evaluators appointed on transactions. There are also numerous ESG consultants specialising in structuring impact metrices in relation to "pay for performance" financial arrangements, or to help issuers and/or investors with benchmarking, traceability, and scoring of extra-financial data.

The shift from voluntary CSR reporting and performance to mandatory ESG reporting on financial and extra-financial data and value-making is well under way. International funds, particularly from Europe and the US are accelerating the standardisation of disclosures by publicly listed companies.

While these legislative and regulatory changes may not clearly distinguish impact finance from sustainable finance, or provide a clear definition of what actually constitutes a sustainable investment, they do at least ensure that financial market participants' needs in terms of ESG data are met to comply with their own reporting obligations.