ELI Issues Guidance on Company Capital and Financial Accounting for Corporate Sustainability

27.01.2023

The ELI Guidance contributes to the important and timely debate on how company law and financial accounting can be reformed to promote corporate sustainability and responsibility, in the interest of business and society at large.

The Guidance includes a set of 20 Recommendations on company capital and financial accounting for corporate sustainability which: (i) provide a frame of reference and analysis to understand corporate sustainability in the context of business and law; (ii) point to specific issues which need to be addressed by European and national lawmakers and regulators; and (iii) establish a set of company law instruments recommending possible solutions to cope with these issues.

In particular, the Recommendations aim at restating and modernising well-established principles of European company law on: (i) distributions; (ii) equity capital maintenance; and (iii) non-distributable reserves. They encourage companies to commit to a prudent use of resources, by setting aside sufficient reserves to meet social and environmental commitments over long-term horizons, and establish a fair balance between these commitments and distributions to shareholding investors.

By proposing a common basis for the convergence of national regulations, with a view to harmonising, clarifying and improving the implementation of company law, corporate governance and corporate reporting  provisions dealing with sustainable business conduct, the Guidance can contribute to EU and national law on sustainable corporate governance, corporate sustainability due diligence, as well as financial and non-financial reporting, while promoting sustainable business conduct by corporate management. It is accompanied by an annex that provides numerical illustrations of its application.

The project was led by Dr Yuri Biondi (Senior Tenured Research Fellow of the National Centre for Scientific Research of France (CNRS) at University Paris Dauphine PSL (IRISSO)), Prof Dr Colin Haslam (Professor of Accounting and Finance at Queen Mary University of London) and Prof Dr Corrado Malberti (Associate Professor of Commercial Law at the University of Trento).

A broad-based acceleration of business insolvencies is expected globally after two years of declines, when governments propped up companies during the pandemic. In Prof Haslam’s words:

the future of Europe depends on new legislation that promotes sustainable business conduct in its broadest sense. The ELI Guidance on Company Capital and Financial Accounting for Corporate Sustainability supports this broad and important endeavour. Its Recommendations are informed by strong well-established founding principles: managing company resources prudently and the need to sustain capital reserves for a going concern. Commitment to these founding principles has become diluted when the focus of corporate governance has tilted towards short-term distributions and shareholder primacy. The ELI Recommendations seek to strike a renewed and fair balance between short-term distributions to shareholders and the need for long-term corporate sustainability.

Prof Haslam’s views align with Prof Malberti’s who emphasised the role of prudent accounting policies in making European companies more resilient, stable and accountable for the benefit of shareholders, stakeholders and the society as a whole. ‘The advancement of European and national company law’, Prof Malberti added:

depends on its ability to change and adapt to the new challenges of our time. The ELI Guidance provides important and timely instructions on how to deal with new challenges. Since we cannot pretend anymore that unforeseeable events will not occur in the near future, we should work to make sure that our legal framework is prepared to deal with these risks.

According to the World Bank, any new adverse developments to our present-day fragile economic conditions, ‘such as higher-than-expected inflation, abrupt rises in interest rates to contain it, a resurgence of the COVID-19 pandemic, or escalating geopolitical tensions’, could cause a global recession. ‘This would mark the first time in more than 80 years that two global recessions have occurred within the same decade.’ Such a prospect points to a clear need to reshape our current approaches.

In focusing on the EU’s position, Yuri Biondi observed:

the European Green Deal has mainly focused on the financial market dimension of sustainable development. But its corporate dimension needs to be addressed through corporate management and governance. Companies themselves need to foster sustainable business conduct. They need to gather resources with a view to developing and implementing long-term corporate action plans that underwrite corporate sustainability, involving social and environmental responsibilities. Financial and non-financial accounting does not only provide information for financial markets, but may be instrumental in facilitating both the prudent management of resources and a fair and responsible balance between shareholder interests and responsibilities.

The output is available here. More information about the project can be found here and in the latest edition of the ELI Newsletter. The Project’s Co-Reporters are available for questions on the project.