The Banque de France and CSR principles

This article was reviewed and approved by a Banque de France executive

The Banque de France anticipates the country's economic risks by giving a financial rating to large companies, mid-sized companies, SMEs and micro-businesses. This rating, which helps convince investors and banks to finance growth, is meant to anticipate the economic risks involved. But in the age of global warming and labour shortages, how can social and environmental risks and CSR be integrated into its measurement tools?

The Banque de France rating covers more than 300,000 companies, namely those with turnover above 750,000 euros. It is based on an analysis of their accounts, their financial commitments, their outlook... and, for a few years now, their CSR commitment. Even if, to date, the approach remains tentative.

For information, the score (or rating) allows companies to take out more credit. It reassures investors about the company's ability to generate profits and repay its debts over a period of 1 to 3 years.

In short, the European Central Bank lends money to banks, which in turn lend to companies. But before lending to private banks in the first place, the ECB asks them for guarantees. Those guarantees lie in the good health of the companies to which these private banks have granted loans. The ECB will only accept these guarantees if the companies can show a rating deemed sufficient on its assessment scale.

This system of scores awarded by Banque de France analysts also reassures banks, since this public institution provides a second layer of vigilance, which matters when thousands of jobs can be jeopardised by mismanagement or an economic downturn.

The Banque de France has the status of External Credit Assessment Institution (like the agencies Moody's, S&P, DBRS and Fitch) and of In-house Credit Assessment System for monetary policy operations.

Yet for several years now, major global institutions such as the IMF have been aware of climate risks, and all these financial players are seeking to take part in international efforts.

1. This awareness has pushed the Banque de France to set up tools to encourage CSR

For now, the Banque de France mainly promotes green finance and wants to develop CSR criteria in its ratings. In finance, people more often talk about ESG criteria, since in this field, which is opaque to the general public, one of the flagship measures is the notion of Governance, which refers to the ability to analyse and justify strategic and financial decisions in a transparent and concerted way.

But for the Banque de France, taking these 3 aspects into account, economic, social and governance, is not easy, especially if these criteria have to be linked to short-term probabilities of default.

Indeed, most of the indicators that define a sustainable approach rely on human factors, perception indices and case-by-case estimates. Yet the Banque de France wants to be proactive in this area.

2. Companies with a CSR approach will enjoy better financing conditions

For now, to establish a rating, an institution like the Banque de France receives balance sheets, income statements, and so on. These documents allow it to analyse and measure each company's financial performance criteria.

But since people remain at the heart of our society, a "qualitative" layer has been added to these calculations. An analyst visits a company's head on average once every 5 years and, during these interviews, asks questions to better understand the company's DNA. In recent years, more and more questions about CSR have appeared in the questions asked by these analysts sent into the field (even if the CSR audit remains very superficial).

It is in this qualitative layer that CSR criteria are currently integrated. This qualitative element is far from predominant in the assessment. More questions on the environmental side may be asked if the company operates in a sensitive or polluting sector.

The social or governance side is also assessed, but again, it depends on the company's activities.

Moreover, these questions on the environment or social matters seem to serve more to assess risk management than positive societal contribution, but the ball has been set rolling and it is moving.

Realistically, the qualitative CSR part currently carries little weight in the rating, but there is a will within the Banque de France to take these elements more into account.

If a company has a poor CSR record, its rating will, to date, be only marginally affected. Yet Banque de France analysts are increasingly aware of these issues and able to compare good practices between two companies in the same sector.

Another factor that could give more weight to the CSR angle in the rating: since January 2022, the Banque de France has moved from 12 to 21 rating levels, allowing a finer granularity of companies' risk profiles.

Another reason why the CSR angle is not obvious for the Banque de France is that its main mission is to judge whether a company will default in the short term: failing to repay its bank, ending up before the commercial court, and so on. This assessment of the risk for the following year does not sit easily with the foundations of CSR, which by definition take a medium- to long-term view.

The other problem is cultural: poor social or environmental practices with direct consequences on our lives are not yet among the criteria considered as "defaulting" in the financial and legal sense in our economic societies.

The Banque de France's methodology for estimating companies' societal impact does not take into account labels, certifications, ratings or non-financial reports. These are used only very marginally by its analysts, essentially for large groups.

But the Banque de France is moving with the times and actively taking part in discussions to democratise the principles of sustainable development. It wants to push leaders to make this shift quickly. However, it must be done without rushing them.

Since 2015, and as a prelude to the next stage of integrating CSR into its rating, it has been sending CSR questionnaires to a sample of companies: this questionnaire should allow it to define a scientific methodology for turning CSR from "qualitative" notions into quantitative criteria that can later be easily integrated into its current financial rating.

One of the questions the Banque de France hopes to answer is: can a parallel be drawn between CSR performance and probability of default? This questionnaire-based approach also aims to raise leaders' awareness of CSR, still a sensitive subject today for bosses of a certain generation.

3. The Banque de France leads by example on CSR

Like other central banks and a growing number of companies, the Banque de France has put in place a CSR strategy. It formalised its strategy in 2016 and strengthened its objectives for the 2021-2024 period, with "action" and "exemplarity" as watchwords.
The Banque de France is committed to acting on each pillar (environmental, social and governance) with concrete objectives and monitoring indicators. A significant part of its strategy aims to pursue its CSR actions in its operational and financial investments and to take the concept of responsible purchasing into account.

On the environmental side, continuing to reduce its carbon footprint remains a priority, alongside ongoing reflection on carbon neutrality. The Banque de France is renewing and strengthening its social commitments by promoting diversity and the inclusion of people with disabilities, and also by initiating, notably in a collaborative way, new ways of working that are more conducive to wellbeing.

Finally, thanks to its influence, it wants to encourage more companies to adopt CSR strategies, which is reflected in stronger criteria for selecting the financial investments it controls, the integration of non-financial criteria into its operational investments, and its responsible purchasing policy.

4. The Banque de France and the environmental side

By including CSR principles in its overall score, the Banque de France has joined an approach initiated in 2011 by the European Commission. Since April 2022, the Banque de France has joined the Carbon Disclosure Project (CDP) and asks companies to publish their environmental data. The central bank joins the 680 other "global financial institutions", representing 130 trillion dollars in assets, that include this criterion, and prides itself on being "the first central bank in the world" to partner with the CDP.

Other signatories include the European Investment Bank (EIB), the insurer Axa, the banks Credit Agricole and HSBC, and the asset management giant BlackRock. The Banque de France points out that it will now have access to the "largest" corporate environmental database "in the world, and will use it to guide its activities as an ESG investor".

At the end of December 2021, the Carbon Disclosure Project revealed that only 272 companies out of 12,000 had received an "A" for their actions on one or more climate issues. Of these, only 14 had received an A in all three categories: climate, forests and water. Despite the rapid evolution of European regulation in the face of current challenges, there is still a great deal of work to do.