CMS Expert Guide to ESG Compensation in France

From a French employment law perspective, regulations governing remuneration are forest out in the French Labour Code and in the applicable collective bargaining agreements, in consideration of the main sector in which the company operates.

At this stage and as a general principle, the French Labour Code does not provide for any specific rule governing ESG criteria and obligations in executive remuneration.

However, companies have the possibility to establish rules in this regard within the framework of works agreements at company or group level.

In addition, some ad hoc laws provide for rules in this regard from time-to-time (e.g. in relation to the gender equality index, please see below).

The only exception to this applies to executives of listed companies under the guidelines of the French Corporate Governance Code of listed corporations dated December 2022 (the “Governance Code” known as “Code Afep-Medef”). The Governance Code mentions that executive compensation must include several criteria related to social and environmental responsibility, including at least one criterion related to the company's climate objectives. These criteria must be clearly defined and reflect the social and environmental issues that are most important to the company. Quantifiable criteria should be preferred.

The Governance Code applies to all listed companies that refer to it.

Mostly E, but also S and G, although they often overlap. 

At this stage, the main obligations are as follows:

• Reporting obligations (in particular re. gender gap and gender equality)
• Reporting against ESG measures in annual reports
• Designing remuneration policies which consider ESG components

Listed companies with more than 500 employees and total assets of more than EUR 20 million or revenues exceeding EUR 40 million and unlisted companies with more than 500 employees and total assets or revenues of more than EUR 100 million must include a Declaration of Extra-Financial Performance in their management report, including:

• social information concerning employment in the company, work organisation, safety, health, social dialogue, training, anti-discrimination measures, gender equality, integration of disabled workers, etc.
• environmental information concerning sustainable development measures (preservation of resources, biodiversity, the fight against pollution and global warming, etc.) and the energy transition process
• societal information concerning relations with stakeholders (suppliers, subcontractors, customers, etc.) and measures aimed at consumer health and safety.

There are no ESG requirements for Directors in the Governance Code.

To design remuneration policies that consider ESG components, the Governance Code indicates that the remuneration policy of listed companies must include several ESG components reflecting the most important social and environmental issues for the company and at least one related to the company's climate objectives.

There are no regulations in France governing ESG obligations for the remuneration of employees who are not directors or top management.

However, please note that companies are including more ESG elements in their internal policies. For example, some profit-sharing schemes provide for a calculation formula that takes into account certain environmental targets. Similarly, some companies are introducing strict internal rules relating to company cars, travel polices, etc. The French government is also encouraging companies to implement internal policies aiming at being increased sustainability (better lighting management, reduced heating, etc.)

Gender equality index: Introduced by a Law of 5 September 2018 the professional equality index obliges companies to use certain criteria to measure, for example, the pay gap between women and men and to highlight improvement targets when these gaps are unjustified. This index has been strengthened by the so-called “Rixain law” dated 24 December 2021. This obligation applies to companies with more than 50 employees.

The employer must calculate the score to obtain each criterion and publish its results on the company's website (in the absence of a website, the information is brought to the attention of employees by any means), in a visible and clear manner, by 1 March of each year.

Since the “Rixain law”, scores must also be published on the website of the Ministry of Labour and updated annually by 31 December at the latest.

The overall score of the index and the results obtained for each indicator must also be brought to the attention of the works council every year.

Four indicators are taken into account when calculating the company’s score:

• Gender pay gap, calculated on the basis of the average pay of women compared to men, by age group and by category of equivalent positions
• Difference in the rate of individual salary increases, not associated with promotions, between women and men
• Percentage of employees who received a raise in the year they returned from maternity leave, if raises occurred during the period in which the leave was taken.
• Number of employees of the under-represented gender among the ten highest paid employees.

One additional indicator is also considered for companies with more than 250 employees: the difference in promotion rates between women and men.

If the result obtained when applying the indicators listed above is below 75 points, the company has three years to comply.

The company must put in place appropriate and relevant corrective measures to reach at least 75 points within a period of three years and, if necessary, an annual or multi-year program of financial measures to make up for this, defined within the framework of the compulsory negotiations on professional equality, or, if no agreement is reached, by unilateral decision of the employer and after consulting the works council.

If, at the end of the three-year period, the results obtained still do not exceed the 75-point threshold despite the implementation of corrective measures, the company may be subject to a financial penalty set at a maximum of 1% of the total wage bill.

Failure to disclose information relating to the index or to take corrective measures for such gaps, the company may be subject to a financial penalty set at a maximum of 1% of the total wage bill, as described above. This penalty will only cease to apply when the company publishes the index or implements corrective measures.

N/A – In France, there are no mandatory remuneration schemes in relation to ESG.

The Governance Code does not contain any rules or guidelines.

In 2021, a study showed that more than 75% of listed companies have introduced corporate social responsibility criteria into the annual variable compensation system of their executives, mostly environmental criteria.

The 2022 annual report of the French Financial Market Authority (Autorité des Marchés Financiers “AMF”) shows that, 77% of the 50 listed companies have introduced non-financial criteria based on operational objectives, strategy and in particular corporate social responsibility strategy, governance, compliance or gender diversity.

At this stage, market practices mostly result from company/group initiatives (in the form of collective agreements) and voluntary adoption standards issued by shareholder or governance associations.

Market practices are derived, on the one hand, from the Governance Code, the High Committee on Corporate Governance’s annual report and the AMF’s annual report and, on the other hand, from some actions of shareholders of listed corporations, the so-called “activist shareholders”.

For instance, the above-mentioned guidelines and reports identify good practices to define non-financial remuneration criteria for companies (i.e. the use of simple, stable, transparent, and quantifiable criteria).

The AMF mentions in its annual report some “good market practices” to identify ESG remuneration criteria.

Practices may slightly differ from one industry to another, but no major trends have been identified yet.

An analysis of company practices shows that the most common ESG KPIS are as follows:

Environment:

• Reduction of CO2 emissions
• Use of renewable/green energy
• Improvement of energy efficiency
• Use of sustainable materials in production
• Recycling, waste management, circular economy
• Carbon footprint

Social:

• Employee satisfaction
• Diversity and inclusion
• Gender Equality Index
• Workplace safety and health
• Employee turnover/retention
• Training
• Pay equality

Governance

• Prevention of corruption and bribery
• Risk management
• Reporting and communication
• Supply chain
• Transparency of executive remuneration
• Material Issues Impacting Stakeholders

Some companies also use external ESG criteria for analysis.

Both

Difficult to say as there are no official statistics, but based on our observations we would say that, so far, ESG-related variable remuneration has not accounted for a large share of the variable remuneration.

There are no statistics on the share of individual ESG criteria but there are statistics on the share of non-financial remuneration in the total variable remuneration. The 2022 AMF annual report provides the share of non-financial criteria, which includes ESG-related criteria, in the remuneration of executives of 50 listed companies. The report states that the share of non-financial criteria in their remuneration increased in 2022 to reach 26% of their yearly variable remuneration and 21% of their long-term variable remuneration.

From an employment perspective and as indicated above, companies with more than 50 employees are required to calculate and publish on the company's website (if there is no website, the information is brought to the attention of employees by other means), in a visible and clear manner, by 1 March of each year:

• the gender equality index, 
• and the results obtained for each indicator.

In addition, since the “Rixain law”, all the indicators of the professional equality index must also be published on the website of the Ministry of Labour and updated annually by 31 December at the latest.

As mentioned above, listed companies with more than 500 employees and total assets of more than EUR 20 million or revenues exceeding EUR 40 million and unlisted companies with more than 500 employees and total assets or revenues of more than EUR 100 million must include a Declaration of Extra-Financial Performance in their management report, including: social, environmental, and societal information.

N/A

In France, there is no specific regulatory body overseeing ESG matters. However, the Labour Inspectorate may from time to time have to deal with ESG-related issues, in particular for all matters relating to D&I and gender equality.

The High Committee for Corporate Governance oversees and monitors the application of the Governance Code and proposes amendments to the code. It also drafts a guide to clarify its interpretation of some of the recommendations stated in the Governance Code and to provide tools to facilitate its application.

It is likely that there will soon be new regulations, in particular with regard to the transposition of the European Corporate Sustainability Reporting Directive as well as the Corporate Sustainability Due Diligence Directive.