The 2017 French Duty of Vigilance Law established wide-ranging obligations for corporations to identify and mitigate human rights, health and safety, and environmental risks arising from their own activities, those of their subsidiaries, and firms in their global supply chain. This research analyses the effects of this legislation on the environmental, social, and financial performance of listed French corporations using granular ESG scores from major ratings providers, LSEG and S&P Global. The study finds a statistically significant negative association between the law and several social and environmental scores, particularly in areas where liability exposure increased.

Introduction

The Duty of Vigilance Law requires large French firms to create “vigilance plans” to address risks across their global operations and supply chains. Failure to comply can lead to civil liability actions. This initiative reflects a broader regulatory trend, including Germany’s Supply Chain Due Diligence Act and the recent adoption of the EU Corporate Sustainability Due Diligence Directive (CSDDD). The law aims to increase corporate accountability and make firms more responsive to risks of negative externalities resulting from their operations.

ESG ratings serve as proxies for corporate performance. If these scores are a meaningful proxy, the introduction of the law might be expected to improve them. However, the use of external ratings creates a measurement problem; firms may optimise their disclosures to “fit” rating methodologies rather than improving underlying outcomes, an application of Goodhart’s law. The Vigilance Law changes this incentive structure by imposing potential legal costs independent of external rating scores.

Related literature

The study builds on research exploring the impact of legal institutions on corporate social performance. Prior literature suggests that the legal origin of a country is a strong predictor of CSR adoption. Previous regulatory strategies relied on disclosure, such as the EU’s Non-Financial Reporting Directive (NFRD). Recent studies in other jurisdictions, like India, have found that mandatory CSR spending requirements can have a “crowding-out” effect, where legally mandated minimums become performance ceilings, reducing the incentive for firms to exceed them.

The ESG movement and the French Duty of Vigilance Law

The French law is regarded as a clear break from previous approaches, moving beyond disclosure to legally enforceable duties. It applies to French stock corporations with at least 5,000 employees in France or 10,000 globally. The enforcement mechanism is two-pronged: competent courts may issue injunctions to compel compliance, and the author of an action or omission constituting a failure to comply is liable for the harm caused. Legal commentators agree that both the corporation and its directors or managers may face personal liability.

Data and empirical strategy

The researchers compiled data on 141 French listed corporations, representing companies for which ESG scores and 2017 employee numbers were available. LSEG data offers more than 630 metrics, aggregating information from more than 180 ESG metrics. A difference-in-differences model was used to estimate the effect of the law’s introduction, with the post-treatment period starting after the final adoption in March 2017. The study controlled for firm size, industry (GICS industry names), year, total assets, and number of employees.

Results and discussion

Contrary to initial hypotheses, the introduction of the Vigilance Law correlates with lower ESG scores. Top-level ESG scores were on average between 12-16 per cent lower for corporations falling within the scope of the law. There was no evidence of a statistically significant association between the law and proxies for corporate financial performance, such as Tobin’s Q or return on assets. These results remained consistent when using S&P Global scores as a robustness check.

Disaggregating the scores revealed that the negative association is concentrated in the social and environmental pillars. Specifically, human rights policy and workforce scores showed significant declines. These areas are most directly related to changes in liability exposure created by the law. No significant association was found with the governance pillar or general emissions metrics, such as CO2 emissions, which fall outside or only weakly within the law’s liability logic.

Two non-mutually exclusive explanations are proposed. First, the law may have redirected corporate efforts away from score-maximising “gaming” or overfitting of ratings towards minimising legal exposure. Second, the law’s requirement for robust risk mapping and the potential for litigation may have prompted the production of more robust and meaningful information, revealing previously hidden deficiencies in corporate ESG performance.

Conclusion

The research suggests that the French Duty of Vigilance Law has led to a relative decrease in ESG scores for affected firms. This likely reflects a reduction in overfitting to rating methodologies or the production of more realistic disclosures. While the law may not have immediately improved underlying behaviour, it has standardised reporting obligations and improved the accuracy of ESG information. It is plausible that more robust reporting will change corporate behaviour in the long run, as firms first adjust practices to reduce legal exposure and subsequently work to mitigate societal harm.