It can be easy to put defined lines around certain topics and categorise them in isolation, but more and more we are seeing the inclusion of environmental, social and governance (ESG) and corporate social responsibility (CSR) criteria across key financial regulations.
In particular, the Non-Financial Reporting Directive (NFRD) in conjunction with the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR) have evolved the French and European regulations further, requiring extra-financial reporting obligations. For example, it is mandatory for financial companies to communicate extra-financial information on each of their activities and financial institutions must include disclosures on how funds take into consideration the environmental objectives.
France has been instrumental in the setting up of an EU Sustainable Finance framework on top of the French regulatory regime providing certain substantial obligations, some of them pre-dating the EU framework. But with the increased presence of ESG and focus of governments in tackling climate change, what comes next?
To fully embed these ESG and CSR principles, the French ESG regulatory framework requires various organisational and implementing actions.
- Clarify relevant processes and procedures of the bank or the firm (and its group), by defining an investment policy and strategy, including providing a list of sustainable products and percentage of total assets.
- From a governance perspective, internal resources need to be dedicated to ESG and sustainable matters, including financial, technical and human resources expertise. Staff trainingis critical to achieve such a purpose, through risks, internal control and HR coordination.
- ESG factors need to be included in the remuneration policies, not only for material risk takers within the meaning of CRD V Regulation but also more generally, to incentivise employees to adhere to and implement such principles in their daily conduct.
- Banks and firms subject to the ESG and Sustainable Finance Framework need to define and implement an engagement strategy which includes voting policy and implementation record so as to ensure concrete implementation of commitments taken and monitoring of "greening" portfolio actions.
- An improvement plan needs to be implemented which includes a continuous improvement plan and strategy, as well as the identification of opportunities for improvement through priority means such as recruitment, change of methodology, and adjustment of the strategy.
The implementation of the ESG strategy therefore has an impact on all banks and firms' activities and requires a priority plan of action. Risks and internal control functions generally coordinate such implementation where strategy is defined by the managers and both strategy and implementation are being supervised at the board of directors' level. The suitability requirements arising from MiFID II provisions as implemented into the French monetary and financial code and the AMF General Regulations are also critical components for such purpose.
Other important changes are expected in the forthcoming months including the setting up of a regulatory capital framework integrating ESG factors, the inclusion of these aspects in the outsourcing framework, details on impacts on resolution and prevention plan, as well as business continuity plans. Given the current moves to incorporate ESG and CSR within financial regulations, it's become more apparent that this cannot be looked at in isolation.
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