Recent updates to the AFEP-MEDEF corporate governance code highlight the growing importance of environmental & social (E&S) oversight within the French market.

The new AFEP-MEDEF code, which is followed by most listed companies in France, was published in December 2022, almost three years after its last update. The major changes to the code focus on how environmental and social responsibility, including climate, should be integrated into corporate strategy, board discussions, and the executive remuneration policies of French public companies. The French acronym “RSE”, present throughout the updated code, stands for environmental and social responsibility.

Background: E&S Issues in the French Market

E&S matters made their appearance in the AFEP-MEDEF code back in 2016 and, since then, their importance and presence increased progressively, both in terms of the code and wider market practice. The creation of board-level committees focused on E&S oversight and the inclusion of E&S metrics in executive remuneration plans have become common features among CAC 40 companies, and in 2022 the French market saw the second highest number of management-sponsored Say on Climate proposals globally, after the UK. Now, some of those existing market practices are being codified into regulation.

This regulatory focus goes beyond AFEP-MEDEF. Back in December, the French Market Financial Authority, or AMF, published its annual report on French listed companies’ governance and executive remuneration. The AMF report always includes a chapter on a specific topic under review during the year. While in 2021 the hot topic was the disclosure of information provided in companies’ corporate governance reports, this year the focus shifted to how companies take E&S issues into consideration.

Among other elements, the report states that in the sample of analyzed companies, approximately half of directors are reported to have E&S skills; however, the AMF also highlights that it isn’t always clear what those skills are, or what process the company used to assess them. Looking at directors’ CVs, the AMF reported that it was not possible to identify the relevant skills and experience for one-third of those identified as having an E&S background.

In the wake of the AMF report, the latest updates to the AFEP-MEDEF code, published a few weeks later, look like a confirmation that the interest around E&S matters in France is strong.

Integration of E&S Considerations in Company Strategy

The code introduces a requirement for the board to determine E&S strategic guidance covering multiple years. Executives must present an action plan on this strategy to the board, along with timeframes for implementation, and report annually on the results achieved.

The AFEP-MEDEF code gets more specific when it comes to climate strategy, asking for clear and defined goals and timeframes. Public companies will need to present their climate strategy and their related key achievements at the shareholders’ general meeting, at least once every three years, to ensure that investors are regularly informed on climate strategy and progress; however, there is no requirement to put a Say on Climate proposal up to a shareholder vote. While a board has the option to amend a previously established action plan and to adapt its goals, the code states that shareholders’ expectations are one of the key elements to be considered prior to modifying a company’s climate strategy.

The updated code does not address Say on Climate proposals specifically, but conversation on the topic in France isn’t likely to die down anytime soon. In January 2023, the High Legal Committee of the Paris Financial Marketplace (HCJP) published a report stating that an advisory vote on climate proposals, which has so far been indicated as a preference by investors and NGOs, does not conflict with any legal rule, and in particular not with the hierarchy principle of corporate bodies.

Board-related Recommendations

AFEP-MEDEF’s emphasis on climate goes beyond top-level strategy; the updated code specifies that the topic should be a regular part of board discussions, and should be included in new directors’ induction training along with more traditional areas of risk and governance.

Further, E&S joined the selection of directors and executives, as well as their remuneration, as a key topic that should be reviewed by a specialized board committee. This last amendment only formalizes a practice that is already widespread in France: as indicated in the chart below, one-third of CAC 40 companies have already established a board committee exclusively dedicated to reviewing and discussing E&S issues.

Executive Remuneration

The code’s requirements regarding the use of E&S metrics in determining executive payouts have increased. The previous version already requested that at least one metric of the executive compensation package be related to social and environmental responsibility; in its latest iteration, the expectation evolved towards the inclusion of multiple E&S metrics in executive incentive plans, including at least one specifically linked to the company’s climate goals. The updated code also clarifies that E&S metrics must be related to the most important social and environmental stakes of the company, and that quantifiable metrics are preferable.

Here too, French market practice on E&S in remuneration is actually ahead of the regulatory update. As identified below, two-thirds of CAC 40 companies featured E&S metrics in both short- and long-term incentive plans in 2022, with the most common metrics being CO2 emissions reduction or gender diversity at management level.

Looking Ahead

There is still room for improvement: investors would be delighted to see clearer and more quantitative targets for E&S metrics. Nevertheless, in most cases, the reality of the French major companies is a step further than the new regulation, progressively increasing the extent to which executive pay is linked to a company’s E&S achievements.

While companies are expected to follow the new code from fiscal year 2023, AFEP-MEDEF specified that the sooner companies start applying the new recommendations, the better. For the majority of CAC 40 companies that won’t require them to change what they’re already doing – however, the pressure on the minority of outliers who haven’t integrated E&S looks set to increase.

***

Glass Lewis continually monitors regulatory developments across the globe so that our clients stay up to date on emerging best practices and local market expectations for key governance and ESG topics. Get in touch to learn more about how Glass Lewis can help you meet your proxy voting and stewardship obligations in hundreds of markets around the world.