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Sustainability reporting in Europe:  a promising challenge for companies

29/09/2022
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Faced with the climate emergency, the ecological and energy transition is becoming a necessity. At the same time, the “big quit” phenomenon, which has been perceptible in the United States for more than a year and has now spread to Europe as a result of the Covid-19 crisis, is generating tension on employment in practically all sectors of activity. On top of this, the return of inflation, the rise in energy prices, the scarcity of raw materials, geopolitical risks and the VUCA  context is well established! In this unstable environment, risk management and organizational resilience  are being put to the test. However, there are optimistic factors on the horizon.

Towards a new vision of the company

First of all, the idea that the role of companies is only to maximize profit for shareholders is now outdated. Indeed, society as a whole expects companies to behave responsibly towards all their stakeholders. By raising the issue of "raison d'être" and giving the possibility to adopt the mission-based  company model, the 2019 Loi Pacte  accelerates this shift towards a more responsible capitalism. According to Article 169 of the Pacte Law, the company is now managed "in its social interest, taking into consideration the social and environmental issues of its activity." This seems a far cry from Milton Friedman's famous phrase about maximizing profits in his 1970 article in the New York Times !

Towards a more global management of performance 

Secondly, the challenges of the current ecological and social transition (EST) require us to move from purely financial performance management to global performance management. Used internally as a steering tool and/or externally for communication purposes, ESG indicators will take on a major importance. This evolution of reporting practices will be accelerated by regulatory pressure, in particular the CSRD, which will make it mandatory to publish relevant, comparable, standardized and reliable ESG  indicators (they will have to be audited by independent organizations) as of January 2024. 
The companies for which this CSR Directive  will apply are the following: companies listed on a European market (including non-European companies, including SMEs, except micro-companies with less than 10 employees), unlisted "large" companies (more than 250 employees and with a balance sheet total of more than €20m or a turnover of more than €40m). 
Unlisted SMEs will be encouraged to publish simplified information according to standards adapted to their needs and resources. In the face of current environmental and social challenges (global warming, ecological crisis, recruitment tensions in certain sectors, etc.), Europe is accelerating the movement in response to investors' expectations for ESG indicators to be integrated into their financial activities. 

Towards more sustainable finance

Finally, sustainable finance is gaining momentum and CSR is becoming a key part of the strategy. As specified in the European Commission's March 2018 Sustainable Finance Action Plan, "investing in environmental and social objectives requires a long-term view. Currently, however, markets often prioritize generating high returns in the short term. A central priority of the sustainability agenda is therefore to reduce the unwarranted focus on short-term performance in economic and financial decision-making, including through increased transparency, enabling investors, both corporate and retail, to make more informed and responsible investment decisions”. This European choice to direct finance towards sustainability issues is shared at the French level by the Minister of Economy and Finance, Mr Bruno Le Maire, who declared in 2021 "Finance is the sinews of the climate war, finance will be green or it won't be" . 

All the questions raised in the above article will be addressed and developed during our “ESG reporting & Financial Accounting” class which is part of our core courses in the curriculum of our KEDGE Global MBA programme

 

Written By Stéphane Ouvrard

Associate Professor in Accounting & Finance at KEDGE Business School

Shared views with Professor Stéphane Ouvrard - Global Executive MBA - KEDGE Business School

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