Corporate Sustainability, Financial Accounting and Share Capital

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Quick Facts

Project Type: Statement of Principles
Procedure: Regular
Adopted: CD 2021/10
Project Period: February 2021–September 2022

Background

Sustainable development, including sustainable finance, is one of the values of the EU as set out by the Lisbon Treaty and the need for it has been reiterated by EU Institutions and experts on several occasions, including in the Directive (EU) 2017/1132 relating to certain aspects of company law and in the final report of the EU High-Level Expert Group on Sustainable Finance from January 2018.

In line with the overall Commission objective of a just transition to a sustainable economy, the European Green Deal Communication and Commission’s Recovery Plan confirm the importance of embedding sustainability into corporate governance. A sustainable corporate governance initiative is planned to be proposed in 2021.

Share capital management and financial accounting thereby play an important role in ensuring sustainable finance and thus corporate sustainability, since only financially robust companies are capable of responding to environmental, social and governance (ESG) considerations, while assuring investor and creditor protections. Financial accounting provides for a convenient legal-economic instrument to control share capital management for managerial, governance and regulatory purposes.

Disclosures by EU companies about their capital management are governed by regulations established for general purpose financial reporting, issued by the International Accounting Standards Board (IASB) and approved by the European Financial Reporting Advisory Group (EFRAG) on behalf of the EU. The IASB’s conceptual framework does not prescribe a model for capital maintenance although reporting entities generally employ a financial understanding of capital maintenance. The IASB did not issue a specific standard on share capital management either. The current European accounting regulation (dependent on the international accounting standards, as adopted in 2002) does not have a specific standard for company equity capital management, while several other accounting standards show limits and shortcomings concerning corporate sustainability, including social and environmental protection. Previous research shows that payout strategy and share capital management, including reserve provisioning, are critical in dealing with corporate sustainability over time and circumstances.

Consideration therefore needs to be given to the principle of prudence in European accounting. Currently, different types of assets held by companies can be recorded at their current value to comply with the International Financial Reporting Standards, allegedly with a view to promoting ‘transparency’ for financial investors and the European common market union. However, this orientation in accounting regulation could be at the expense of prudential capital management, which, in turn, could impact negatively on the financial stability and resilience of companies.

Financially fragile companies cannot afford to properly respond to ESG considerations. In this context, share capital and financial accounting are important legal-economic instruments to make companies financially robust. EU law and regulation may therefore be exposed to policy inconsistency if its overall objectives of sustainability do not meet consistent rules for share capital management and financial accounting.

The current debate on corporate sustainability – including the ways companies deal with their stakeholder, social and environmental responsibilities – treats these responsibilities quite separately from company law and even shareholder interests. Consequently, ESG considerations are most often related to non-financial disclosures with a view to better inform financial investors in capital markets.

The project connects instead these responsibilities with the debate on the shareholder value model of corporate governance and business management, focusing on a fundamental and neglected issue of that model: payout strategy and equity capital management. 

 

Aim

The project aims to investigate the relationship between corporate sustainability, share capital management and financial accounting, by employing a prudential perspective on corporate affairs with a view to achieve the on-going sustainability of companies over time and circumstances.

Further, the project aims to identify actual techniques and mechanisms that are used to enact or result in unsustainable corporate policies, in order to show their inconsistency with the general principles of share capital maintenance, investor and creditor protections, and broader ESG considerations.

The overall purpose of the project is therefore to elaborate on and assess the EU’s legal position and regulations governing corporate sustainability through a prudential approach to share capital management and its maintenance.

 

Outcome

The Project Team aims at developing a set of company law Principles. The latter will seek to propose financial accounting adjustments with a view to aligning current practices with both sustainable business conduct and sustainable corporate governance practices, which deal with accounting and related disclosures as well as their preparation and supervision.

Events, Publications and Other Activities

For an overview of past and upcoming events of this project, please click here.

Project Reporters

  • Yuri Biondi
  • Colin Haslam
  • Corrado Malberti

Project Team Members

  • Francesco Avolio
  • Georges Cavalier
  • Maria di Sarli
  • Clemence Garcia
  • Laura Guercio
  • Razvan Hoinaru
  • Hana Horak
  • Akio Hoshi
  • Christopher Hossfeld
  • Ana Ježovita
  • Anne Le Manh
  • Vera Palea

Advisory Committee Members

  • Mario Abela
  • Antigoni Alexandropoulou
  • Tord Andersson
  • Reuven Avi-Yonah
  • Yasmine Chahed
  • Thomas Clarke
  • Sandra Cossart
  • Andra Cotiga
  • Patrick de Cambourg
  • Frederique Dejean
  • Ewald Engelen
  • Anne Birgitte Gammeljord (Assessor)
  • Miguel Gimeno-Ribes (Assessor)
  • Hideki Kanda
  • Katja Langenbucher
  • Martina Macpherson
  • Sinisa Petrovic
  • Meliha Povlakić (Assessor)
  • Jean-Philippe Robé
  • Shizuki Saito
  • Silvana Sciarra
  • Konstantinos Sergakis
  • Shyam Sunder
  • Eiko Tsujiyama
  • Valerie Viard

Members Consultative Committee

  • Arvind Babajee
  • Alessio Bartolacelli
  • Giuliana Birindell
  • David Dolidze
  • John Gaffney
  • Jonathan McGowan
  • Lela Mélon
  • Georgios Papachristou