The EU
continues to propose regulations and standards for companies around ESG disclosure, with the Platform on Sustainable Finance (PSF) the latest group tasked with assisting the European Commission on how it should approach “social issues” including diversity, carbon emissions and customer welfare.
The draft EU report, which has been
published for public comment, states that since ESG issues are now at the center of good business practice, the EU should mandate that they should be linked to executive pay. However, there was less consensus regarding how prescriptive this mandate should be and the nature of the link:
- In order to avoid “interfering with company autonomy,” companies should be allowed to choose their own sustainability targets and link them to long-term incentives (with the potential for clawbacks if needed)
- Sustainability metrics are less standardized and comparable between companies, which makes comparison less effective
- Tying ESG metrics to pay could lead to “greenwashing” or “gamification” that would render the practice ineffective or even harmful
The draft report also notes the existence of several other EU initiatives covering executive pay and ESG. An
upcoming proposal on sustainable corporate governance would mandate the inclusion of sustainability metrics while
proposed regulatory standards would require financial market participants to disclose board diversity. The consultation closes on August 27 and the European Commission will aim to publish a final report by the end of this year.
Although this legislation, if finalized, would only impact organizations operating in the EU, it is very likely that we would see its influence in future mandates in the UK and the US, as has so often been the case. Of particular interest is the focus on tying ESG metrics to long-term incentive plans, since the approach by US companies has largely been to tie such metrics to annual incentives in order to encourage rapid progress.
