Climate-related Financial Risk Factors in Compensation Frameworks

The FSB published its Climate-related Financial Risk Factors in Compensation Frameworks report, discusses the increasing trend of financial institutions using non-financial measures, including ESG aspects, to drive accountability for performance measurement in order to determine variable compensation.
The report specifically focuses on how climate-related financial risk factors are being incorporated into compensation frameworks. The report provides examples of evolving practices from various financial institutions around the world, such as banks in Europe and the Middle East, an insurance company in Europe, and an asset management firm in the Americas. These institutions are incorporating climate-related targets into their performance measurement to determine variable compensation.
The report also highlights the expectations of various regulatory bodies, such as the Bank of Italy, Consob Issuers Regulation, and the Monetary Authority of Singapore, for financial institutions to address environmental and climate-related risks. These expectations include incorporating sustainability risks into the risk management system and ensuring that remuneration policies contribute to corporate strategy, the pursuit of long-term interests, and company sustainability.
The report notes that climate-related financial risk factors in compensation frameworks are still an emerging theme, and the means by which the strategic goal is translated to the compensation framework is developing. However, international bodies recognize that the link with compensation frameworks can be a way to incentivize and drive progress for strategic goals. The report cites the Status Report from the TCFD and the Exposure Draft on Sustainability-related Disclosures by the ISSB as examples of documents that recognize the importance of remuneration policies in achieving an organization’s goals and objectives.
The report provides an early insight into a fast-moving field to assist ongoing initiatives of regulators and financial institutions. It does not aim to present and compare practices across jurisdictions, but rather to identify challenges and provide examples of evolving practices. The report concludes by noting that the incorporation of climate-related financial risk factors into compensation frameworks is an important step towards achieving a sustainable future.