From internal governance to integrated compliance for corporate sustainability

The recent reform of the corporate crisis regulation (Legislative Decree no. 14/2019) has highlighted debt sustainability and its management as the main conditions to safeguard the going concern. The new forward-looking approach to corporate crisis management aims at prevention (risk monitoring and evaluation) and timeliness (alert and alarm instruments) as the cornerstones of companies’ legal management model (art. 2086, para. 2 of the Italian Civil Code).

The adequacy of the so-called internal governance, i.e. of the organizational, administrative, and accounting structure, has in fact become the new management model, both as a legal obligation in order to define liability of corporate bodies in case of a default (art. 2476, para. 6 of the Italian Civil Code) and – mainly – as an opportunity for entrepreneurs to ensure a correct and efficient performance of the business activity.

Moreover, the adequacy of management systems, which is required to companies under the reform of the insolvency regulation to prevent crisis and safeguard the going concern, finds an efficient correlation in organizational models under Law no. 231/2001 (MOGC) in the perspective of an effective integrated compliance.

In such a context, the regulation of the new negotiated settlement of corporate crisis has defined the content of adequate management structures from a functional perspective, providing for alert instruments and new alarms to safeguard the going concern.

Moreover, the European Banking Authority (EBA) defines planning and monitoring as the conditions to access credit. Lastly, debt management and sustainability aimed at safeguarding the going concern are among the specific contents provided by ESRS, i.e. the new European Sustainability Reporting Standards elaborated by EFRAG within the ESG field.

Particularly, non-financial – or better, “sustainability” – information, which integrates financial data, is a crucial element for the integration of  ESG risks and factors into corporate management systems, thus confirming the need for all stakeholders to have continuous and timely access to updated and reliable information on the company’s situation, including qualitative and mainly forward-looking information, in line with the forward-looking approach which is the pillar of the crisis prevention and risk management system which characterizes the so-called “integrated compliance”.

Therefore, the adequacy of management systems is also a condition to disclose sustainability information and, as said, this is directly related to the going concern principle, since it requires an integration of information on the risks related to environmental  factors (among others) in a strategic perspective (obligations and opportunities) and through a forward-looking approach, which is necessary for business management planning and for the identification of the relevant measurement parameters, in order to prove sustainability during the company’s period of activity. In this sense, the above economic and business “going concern” principle is now turning into the multidimensional, more complete and integrated “business sustainability” principle.

This evolution is due to the mutual relation between both principles, since companies are required to integrate ESG sustainability factors and risks into their management systems to safeguard the going concern and, at the same time, they need to safeguard their going concern to pursue ESG sustainability.

Business activity sustainability was also the focus of the European programme in 2018, as a Sustainable finance action plan was implemented with the main aim to address capital towards sustainable investment and to introduce a mandatory integration of risks related to the environmental and social impact of economy.

An environmentally sustainable loan is defined as a loan aimed to finance sustainable economic activities from an environmental perspective. This is part of the wider “sustainable finance” concept, which means any financial instrument or investment, including shares, debt securities, guarantees, or risk management instruments issued against the provision of financing activities, which meet environmental sustainability requirements.

Therefore, the need to disclose information on sustainability is determined by the need for further and more detailed information by corporate stakeholders. In fact, ESG aspects are now relevant for companies as a competitive advantage and will become more and more relevant for their maintenance, as they also lever the intangible value of companies.

In such a context, a good tax governance related to the tax control framework and cooperative compliance falls within the ESG factors, too.

Therefore, ESG aspects will more and more represent a necessary condition which companies must learn to deal with, by implementing a reporting model, adopting recognized standards and criteria, and integrating the traditional reporting system, thus realizing a continuous monitoring of the sustainability strategy, where ESG targets contribute, together with financial ones, to the going concern, or, as newly defined, to corporate sustainability.

In brief, the adequacy of a company’s internal governance and the forward-looking approach are the access point to an integrated compliance for the pursue of corporate sustainability.