Compensation increasingly linked to ESG goals
With a lot of discussion on the how and when of sustainability disclosures, it can be easy to forget some of the motivations behind the changes. This week the Financial Stability Board (FSB) published a report taking a deep dive into climate-related risk in compensation frameworks – an area that relies on quality, reliable, climate-related data.
The FSB’s Compensation Monitoring Contact Group (CMCG), responsible for the report, have observed that financial institutions are increasingly using climate metrics to drive accountability for delivering outcomes. Compensation frameworks can drive progress towards strategic goals in climate – a step beyond disclosure and risk management, turning directly to incentives. The report surveys how climate-related financial risk has been incorporated into compensation frameworks by financial institutions.
The Task Force on Climate-related Financial Disclosures (TCFD) and International Sustainability Standards Board (ISSB) have both outlined how remuneration policies can be linked to accountability for progress towards climate-related goals.
The FSB found common challenges in all sectors beginning to introduce these metrics – and, unsurprisingly, among others (selecting suitable KPIs, misaligned timing, incentive challenges) a key theme is the data gap. A lack of suitable disclosure and transparency, and unreliability of existing data, makes it difficult to conduct climate risk analysis in a quantitative and reliable way.
Whether you agree with the growing implementation of non-financial metrics into compensation frameworks or not, they are starting to take hold in various sectors – and the key, as with most things climate-related – is ensuring that solid, reliable data is used – underpinned by digital, internationally comparable disclosures.
Read more here.