Partner Sylvie Gallage-Alwis and Associate Gaëtan de Robillard discuss topics such as the legislative framework, the reporting obligations, the integration of ESG in business operations and the litigation risks.
Sylvie and Gaëtan’s chapter was published in Chambers and Partners’ ESG 2023 Global Practice Guide, 9 November 2023, and can be found here.
In recent years, France has embraced the march toward a sustainable and circular economy. This trend translates into the legal field with the rise of environmental, social and governance (ESG) standards. The country’s corporate and financial realms are diligently weaving ESG benchmarks into their commercial and operational strategies, mirroring a larger European transition towards eco-conscious decisions.
This evolution is not merely a corporate phenomenon but resonates deeply within France’s political landscape. This resonance was most evident when President Macron, during the 2022 French elections, unequivocally declared: “The policy I’ll pursue over the next five years will either be ecological or it won’t be.” Such a definitive proclamation highlights the paramount importance environmental protection is held in within the corridors of French leadership.
As the following paragraphs will demonstrate, France’s commitment to preserving the environment predates Macron’s presidency – although the President’s declaration proves this commitment is unwavering. As France charts its future, it is clear that ESG practices will continue to be a foundational pillar in the country’s approach to business, investment and governance.
France’s Legislative and Regulatory Framework in 2023
A myriad of laws has been passed during the past decade regarding environmental, governance and social change, including the following legislation.
- The Anti-Waste Law (2020) aimed to reshape the economy based on the circular model by enhancing the requirements for transparency towards end consumers by imposing labelling on waste-generating products and informing consumers of the environmental and sustainable qualities of each product. The legislation chiefly targets the reduction of waste, with a notable emphasis on curbing single-use plastics (eg, plastic straws). In addition, it fosters a culture of product reparability and durability, setting ambitious goals for electronics refurbishment. By pushing companies to adopt more sustainable production and consumption models, the law reinforces France’s commitment to creating an eco-conscious circular economy.
- The Climate Resilience Law (2021) followed in the footsteps of the Anti-Waste Law. Many of its provisions resulted from the citizens’ climate convention, which provided 140 measures to achieve at least 40% reduction in greenhouse gas emissions by 2030 in the spirit of social justice.
- The New Economic Regulation Law (2001) set the tone at the turn of the century by enabling shareholders and stakeholders to better assess the overall performance of companies. This early legislation paved the way by mandating large companies to disclose non-financial information, laying the groundwork for today’s comprehensive ESG reporting standards in France and potentially influencing broader European initiatives in corporate transparency and accountability.
- The Action Plan for Business Growth and Transformation, otherwise known as the PACTE Law (2019), then built on the previously described framework by modifying Article 1833 of the French Civil Code by providing that a “company is now managed in its corporate interest, taking into consideration the social and environmental issues of its activity”. In addition to this mandatory regulation, the same law provides for the possibility of a raison d’être in its by-laws, which consists of “the principles with which the company equips itself and [in] respect of which it intends to allocate means in carrying out its activity”.
- The Law on Energy and Climate (2019) provides that portfolio management companies must make available to their subscribers and the public a document setting out their policy on the inclusion in their investment strategy of ESG criteria and the measures taken to contribute to the energy and ecological transition, as well as a strategy for implementing this policy.
- The Duty of Care Law (2017) – also known as the Corporate Duty of Vigilance (Devoir de Vigilance) Law – targets companies that either employ 5,000 individuals within France or those with a global workforce of 10,000 or more, provided their registered offices are situated in France. Such companies are mandated to devise and implement a robust vigilance plan. The core objective of this plan is to pre-emptively identify and address potential human rights violations, environmental concerns, and ensure the health and safety of the employees. Notably, the reach of this law is not confined within the borders of France. It boasts an international ambit, holding companies accountable for their operations both domestically and abroad, setting a benchmark in corporate responsibility and accountability.
- The Law on Transparency and the Fight Against Corruption and the Modernisation of the Economic Life (2020) (the “Sapin II Law”) created a French version of the US Deferred Prosecution Agreement – namely, the Convention Judiciaire d’Intérêt Public (CJIP). This mechanism has been used in a few landmark cases to impose fines on companies that have used corrupt practices. It ought to be noted that the Law on the European Public Prosecutor’s Office, Environmental Justice and Specialised Criminal Justice (2020) has expanded the scope of this mechanism to prosecute breaches of the Environmental Code that constitute an offence.
- The Rixain Law (2021) has ‒ from a purely social perspective ‒ been designed to introduce the requirement of balanced representation between men and women in boards of directors and supervisory boards, as well as improve professional equality more broadly.
- The Gender Equality in the Workplace Law (2018) is a similar testament to France’s dedication to bridging gender financial and representation disparities within the corporate landscape. This legislation mandates companies to compute and publicise their gender equality indices, offering a transparent metric on wage differentials between male and female employees. Firms that fail to demonstrate substantive efforts to reduce these pay gaps face the prospect of financial penalties. By instituting such a framework, the law aims to expedite the realisation of gender pay parity and foster a more equitable work environment in France.
Within the EU, France has been a front-runner in promoting and implementing ESG initiatives. France’s legislative landscape (eg, the Corporate Duty of Vigilance Law) predates many EU-wide initiatives. Such domestic legislations have often served as benchmarks or inspirational sources for broader EU directives.
What is more, the French financial market aspires to become the global hub for green finance. France’s stance on sustainable finance has encouraged the EU to adopt more robust financial regulations, encompassing ESG disclosures, green bonds, and sustainable investment criteria. The French government has been among the top three issuers of green bonds since they appeared, leading by example.
The European Green Deal, aimed at making the EU carbon-neutral by 2050, finds a resonating ally in France. French policies, particularly the Energy Transition Law (Loi relative à la transition énergétique) (2016), align with and support the overarching goals of the EU’s ambitious environmental roadmap.
ESG Reporting Obligations
By virtue of Articles L 225-102-1 and L 22-10-36 of the French Commercial Code, certain types of companies are required to disclose a non-financial performance statement, which must take into account the social and environmental consequences of their activities – for example, the consequences on climate change, sustainable development, the circular economy, or employees’ working conditions.
It is also worth mentioning Article L 229-25 of the French Environmental Code, which requires companies with more than 500 employees to draw up an assessment of their greenhouse gas emissions and to provide a summary of the contemplated measures to reduce these emissions (along with a transition plan). As of 1 January 2023, not only do the direct and indirect (Scope 1 and 2) greenhouse gas emissions generated by the company’s activities need to be taken into consideration when calculating the greenhouse gas emissions balance – so do all significant indirect emissions resulting from the company’s operations and activities and, where applicable, from the use of the goods and services it produces (Scope 3).
Other than that, under the Corporate Duty of Vigilance Law (2017), companies must establish a due diligence plan. Likewise, under the Sapin II Law (2020), companies must establish a corruption risk map.
At the EU level, the Corporate Sustainability Reporting Directive (CSRD) entered into force on 5 January 2023 and created the first EU-wide mandatory sustainability reporting obligation. These reports must contain the non-financial reporting necessary to have a comprehensive understanding of the company’s sustainability. France’s eagerness to tackle ESG issues was demonstrated when it became the first country to transpose this directive into its national law, having passed a law on 9 March 2023 bestowing upon the government the power to draft measures that align with the CRSD. The CRSD specifically requires companies to set targets and self-report on their progress towards said targets, mostly from an environmental and carbon-footprint perspective. To ensure that companies are providing reliable information, they will be subject to independent auditing and certification.
There might be a new regulation at the EU level to reinforce the obligations set out in the CSRD. The EC put forward a proposal to reinforce due diligence requirements concerning corporate sustainability. As of now, inter-institutional negotiations on the Corporate Sustainability Due Diligence Directive (CSDD) have started and it is expected to be formally adopted in 2024 – following which, member states will have two years to implement the provisions into national law.
Just like the French Corporate Duty of Vigilance Law (2017), the proposed directive requires certain categories of companies to establish due diligence processes and policies to identify, prevent and mitigate adverse human rights and environmental impacts in their own operations, as well as those of their subsidiaries and supply chains. It provides for a number of mechanisms, including complaints handling, periodic evaluation measures, and annual reporting.
The proposed directive also provides for the creation of a supervisory authority in each member state responsible for ensuring compliance with the obligations imposed on companies. It also proposes the establishment of a European network of supervisory authorities that will bring together representatives of national bodies to ensure co-ordinated action and aligned practices, particularly with regard to investigations and sanctions.
Integration of ESG Into Business Operations
According to Article 1833 of the French Civil Code, a company is managed in its social interest, taking into consideration the social and environmental impacts of its activities (irrespective of its size or corporate structure). This is, however, merely a best-effort obligation – given that non-compliance with this requirement cannot lead to the nullity of the acts or deliberations of the bodies of the company.
For limited companies, the board of directors determines the company’s ESG strategy and the means to implement such a strategy. In practice, the board of directors now makes sure that ESG issues are at the heart of the company’s strategy and will usually appoint a specialised board committee dedicated to monitoring ESG issues. The management board ensures that the company is able to comply with the relevant ESG regulations.
If a company has adopted a raison d’être in its by-laws, the board of directors is required to take this raison d’être into account when performing its duties. The raison d’être encapsulates the values of the company, the social and environmental impacts of its activity, and – more generally – the responsibility that the company intends to carry in the future.
This being said, a study led by Heidrick & Struggles in September 2023 of a pool of 879 corporate directors revealed that managements still find it difficult to deal with environmental questions and to implement concrete measures in favour of environmental protection, despite their climate awareness.
ESG-Related Litigation Risks
In the context of ecological transition, and given the public pressure for transparency on ESG strategies, ESG-related litigation risks are high for companies. There are already a number of proceedings pending before the French courts in this area.
Non-governmental organisations (NGOs) play a critical role in this field. They are particularly active before the French courts and have already initiated a significant amount of ESG-related litigation. Notably, NGOs have filed a number of claims on the grounds of the Corporate Duty of Vigilance Law (2017), regarding misleading commercial practices or non-contractual liability. ESG-related litigation can also be based on unfair competition law or commercial denigration in business-to-business disputes.
Another important risk of litigation lies with environmental allegations and greenwashing. Known as écoblanchiment in French, greenwashing consists of using ecological and environmental arguments to promote the idea of environmental responsibility even though the company’s product or real actions do not comply with the presented conditions or claims.
French law has several legal tools to tackle greenwashing – misleading commercial practices being the most natural ground used to punish professionals who use insincere environmental claims. Article L 121-2 of the French Consumer Code thus prohibits commercial practices that mislead consumers regarding the ecological characteristics of a product, a service, or a company more generally.
The penalties incurred can be a fine of no more than EUR300,000 for a natural person (or EUR1.5 million for a legal entity). These amounts may be increased to 10% of the annual average turnover calculated over the previous three years – or to 50% of the amount of the expenses incurred to address the misleading claim – when the profit generated from the misleading practice exceeds the amount of the initial fine. The amount of this fine can be increased to 80% when it is a misleading environmental claim.
When facing ESG-related disputes, companies’ exposure is not only of a financial nature. It is also a reputational one.
In theory, several regulators come into play when it comes to ESG issues. In practice, the bulk of the enforcement comes from two distinct bodies: the French Financial Market Authority (Autorité des Marchés Financiers, or AMF) and the Directorate for Competition, Consumer Affairs and Fraud Control (Direction Générale de la Concurrence, de la Consommation et de la Répression des Frauds, or DGCCRF).
As this area of law is relatively new, the regulators are tasked with exploring previously uncharted territory. This can cause some confusion as to where the jurisdictional responsibilities of one body end at that of another begin.
In terms of targets, the AMF will ensure that the ESG information conveyed to investors is trustworthy. The DGCCRF is also aiming to tackle ESG issues and, in particular, greenwashing.
Say On Climate
“Say on Climate” is an example of how private initiatives have accompanied public legislation in the realm of sustainability. This initiative has gained notable traction in France via the Sustainable Investment Forum (Forum pour l’Investissement Responsible, or FIR), with the ambitious objective of reaching the “transition to net zero”. This initiative presses asset owners or companies directly to vouch for a science-based Climate Transition Action Plan and submit it to a shareholder vote.
“Say on Climate” may become mandatory for listed companies in the near future. In fact, in the context of the parliamentary discussions around the draft Law on the Green Industry, Members of Parliament have voted in favour of the “Say on Climate” amendment ‒ pursuant to which, a consultative and non-binding vote on the listed companies’ climate strategy must be organised every three years. This amendment will be debated by a joint committee on 9 October 2023.
Despite the lack of mandatory requirement to that end, it ought to be noted that nine listed companies have decided to subject their climate plan to their shareholders’ vote so far in 2023. Such climate plans have been widely adopted by the shareholders (at a rate of 93.3% on average).
France’s ESG landscape offers a compelling lens through which to understand the evolving paradigms of corporate responsibility. Historically, the primary objective of a corporation was clear-cut ‒ ie, profit maximisation. Yet, in the context of the ecological transition, an intricate tapestry of public incentives and private ambitions is challenging the status quo.
On the one hand, there exists a burgeoning desire within the corporate sector to be a force for positive change. The allure of maintaining a pristine corporate image, coupled with the potential advantages of branding oneself as a proponent of ESG principles, is a significant motivator. This is not merely about tokenistic gestures or superficial brand-building; it reflects a genuine aspiration to integrate ESG considerations into the core operational and strategic facets of business.
On the other hand, regulatory mechanisms are an ever-growing presence. Hefty fines loom over corporations in addition to the fear of tarnishing their corporate reputation; two powerful deterrents against unsustainable or unethical business practices. This “stick” approach complements the “carrot” of potential reputational gains, collectively formulating a potent mix that pushes companies towards a meaningful change.
In essence, what can be seen in France is a progressive shift in the accepted purpose of corporations. No longer is it enough to merely generate profit; there is a growing consensus that this should be harmoniously combined with sustainability goals. Corporations are gradually being recast not just as economic entities but as societal stakeholders with a profound obligation to ensure that their actions are both profitable and sustainable.
Sylvie Gallage-Alwis and Nikita Yahouedeou discuss the DGCCRF’s recent practical guide to online shopping and consumer rights in Le Monde du Droit
28 November 2023
28 November 2023