ELI Guidance on Company Capital and Financial Accounting for Corporate Sustainability

Summary

The ELI Guidance proposes a set of Recommendations on company capital and financial accounting for corporate sustainability aimed at: (i) providing a frame of reference and analysis to understand corporate sustainability in the context of business and law; (ii) pointing to specific issues which need to be addressed by European and national lawmakers and regulators; and (iii) establishing a set of company law instruments which set out possible solutions to cope with these issues.

Background

Environmental, social and governance (ESG) considerations rank high on the EU agenda. These considerations concern broad matters pointing to the sustainable and responsible long-term relationship of companies with stakeholders, society and nature. The EU has developed the European Green Deal, taking an active role in the global momentum towards fostering and facilitating sustainable business conduct.

In this context, an important and timely debate is ongoing as to how companies could and should be sustainable and responsible for the benefit of business and society at large. As a matter of fact, it is quite evident that only financially robust companies may be able to afford the pursuit of corporate sustainability over time and circumstances.

The present contribution to this debate draws upon this common sense assumption, pointing to the relationship between corporate sustainability, company law and financial accounting. Company law requirements concerning equity capital management could benefit from reform to facilitate corporate sustainability. Financial accounting and reporting further provide convenient legal-economic instruments to control company capital management and encourage sustainable business conduct over long-term horizons and planning.

Aim

The ELI Guidance proposes a set of Recommendations on company capital and financial accounting for corporate sustainability aimed at: (i) providing a frame of reference and analysis to understand corporate sustainability in the context of business and law; (ii) pointing to specific issues which need to be addressed by European and national lawmakers and regulators; and (iii) establishing a set of company law instruments which set out possible solutions to cope with these issues.

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.

Outcome

The 20 Recommendations contained in the Guidance 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.