France Introduces Possible Jail Time As Penalty For Non-Compliance With Sustainability Disclosure

Corporate sustainability reporting is about to get real. Starting January 1, 2024, the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) will officially take effect, requiring in scope companies to disclose information on what they see as the risks and opportunities arising from social and environmental issues, and also on the impact of their activities on people and the environment.

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However, for an EU directive to become operational, it must be incorporated by member states into their own national legislative frameworks. Although passing a directive is a key step in the enforcement process, that directive does not become applicable as a law until it is implemented by each EU country. The EU Commission, the EU’s main executive body, in its role as “Guardian of the Treaties,” supports and monitors the member states in making sure that they properly apply the requirements of each directive. In the case of CSRD, the deadline for the member states to transpose the law is July 6, 2024. Between now and then, expect a flurry of action within each of the member states and the businesses that operate inside their borders. But don’t expect the member states to go easy on implementation of the law.

France Sets a High Bar

France has set a tone for how individual member states will interpret the CSRD by becoming the first member state to implement the law on December 6, 2023. In doing so, the French government also introduced some serious penalties for non-compliance. For example, it appears that fines for various infringements could be up to €75,000 with the additional threat of five years imprisonment. That should catch the attention of the c-suite, compliance, and legal teams with operations in France. If your company is in scope for this particular piece of legislation, it would be a good use of your time to make sure you fully understand the implications of non-compliance.

To be sure, the CSRD includes some of the most rigorous sustainability reporting requirements ever to be imposed on businesses, among them the responsibility to disclose sustainability related risks in their own business and in those of their suppliers, and the requirement to have all of that information scrutinized and evaluated by independent assessors for assurance purposes. In threating possible prison time for business leaders who are non-compliant, France is making it clear that they do not intend to play games with companies that try to spin a positive sustainability narrative. They expect hard data, signed off by auditors, addressing the facts related to these risks.

At this point it is important to remember that EU Directives are the mechanism by which the minimum requirements are set out; each member state can go harder if they wish, and at the same time, they have the ability to set their own penalties for non-compliance.

A Guidebook for What to Expect

France’s transposition of the CSRD should not come as a surprise. In fact, as part of the rollout of the CSRD, the European Financial Reporting Advisory Group (EFRAG), the technical advisor assigned to draft the European Sustainability Reporting Standards (ESRS) that will guide compliance with the law, has developed a literal guidebook that lays out in comprehensive detail many of the reporting and measurement requirements and explains how companies can comply with them.

The CSRD and associated ESRS have and will become a critical component of the EU’s efforts to standardize sustainability reporting, and it is widely expected that member states impose their own specific requirements in their local transposition — which has certainly proved true in France.

For business leaders that want to get an early look at what local regulations in the regimes in which they operate might look like, the ESRS are a good place to start. Broken out into 12 approved final draft standards, the ESRS include five different aspects of Environmental sustainability reporting, such as climate change, pollution and water and marine resources, biodiversity and ecosystems and resource use and circular economy. On the Social front, the standards outline four different areas of focus, including a company’s own workforce, workers in the value chain, affected communities and consumers and end users. In the Governance category, the standards focus squarely on business conduct. In addition, 2 “cross -cutting” standards provide guidance on general requirements and general disclosures.

Act Locally, Think Globally

For the holdouts and laggards who still think that they don’t need to worry about this yet—particularly those in the U.S., where the Securities Exchange Commission’s (SEC) own Climate-Related Disclosure Standards keep getting delayed—it should be noted that the CSRD will affect non-EU companies too. According to research from LSEG, some 10,000 non-EU companies, including 3,000 U.S. companies, will be subject to the mandate. Reporting requirements for non-EU companies are expected to be delayed until 2026, but as France has now made clear, the penalties for not being ready could be significant.

And let’s not forget, France is just one of 27 EU member states who will be transposing the CSRD into their own legislative frameworks, and each has the ability to set their own penalties for non-compliance. That’s a lot to take into account when multinational companies are evaluating their approach to corporate sustainability reporting.

That should make the New Year message on corporate sustainability reporting pretty clear: Don’t delay when it comes to getting the pieces in place to comply with the CSRD and ESRS. The new reporting regime is here, and it means business.