ESG: Sustainable Executive Remuneration

The EU Corporate Sustainability Due Diligence Directive requires strengthening

With its proposal for a Corporate Sustainability Due Diligence Directive (CSDDD), the European Commission wants companies to identify actual or potential negative impacts of their business operations on human rights and the environment and take measures to prevent and mitigate them.

It also requires them to make their business plans and strategies compatible with the transition to a sustainable economy and global warming mitigation, in line with the Paris climate agreement.

The CSDDD is an important milestone, as the Commission is showing its intention to align more closely with international standards such as the UN Guiding Principles on Business and Human Rights. Moreover, the fact that the European Commission is pushing for human rights and climate change to play a more prominent role within the spectrum of European corporate governance is a positive development. However, to be truly effective, the CSDD does call for more focus in a number of areas.

The role of business executives for a sustainable and inclusive economy

With the CSDDD, the Commission confirms that business has a crucial role to play in the transition to a sustainable and inclusive economy, with a primary responsibility for executives.  However, one of the key catalysts for change in this regard, is missing: sustainable executive remuneration.

Research, performed by the Reward Value Foundation, shows that companies need to adjust their remuneration policies in two areas if they want to increase their positive impact on people and planet. First, there must be a clear and relevant link between the executive remuneration and a company’s actual performance. This should include the financial, social and environmental impact of such an organization. Secondly, it is important to extend the time horizon of remuneration and make executive’s focus more on long-term value creation. 

Transition towards a sustainable economy requires a strategic long-term orientation from business leaders. The CSDDD fails to embrace these concepts, and only mentions ‘variable remuneration’ in a very narrow and brief way.

 

To begin with, the CSDDD decouples the concept of responsible executive remuneration from a broader interpretation of sustainability, choosing instead to focus on the topics of climate change and emission reduction. This leaves out important topics such as human rights, social factors and other environmental issues – which are instead strongly represented in the CSDDD in other places. An unnecessarily narrow application of the concept of sustainability in relation to remuneration.

Make Sustainable Executive Remuneration one of the spearheads

When it comes to the focus by executives on long-term value creation, the CSDDD also leaves a stitch in the air. While the text mentions the concept of a ‘long-term interest’, it does not define or elaborate on it. Especially given the great importance of a link between executive remuneration and a long-term focus, this topic deserves explicitly more attention.

In principle, the CSDDD is an important document with the potential of creating real change in corporate behavior, fostering sustainable and responsible business practices.

However, the lack of focus on sustainable executive remuneration – as well as some other shortcomings in different parts of the Directive – makes it a significantly less effective tool than it could and should be.

We would therefore like to invite the European Commission to confidently embrace the full potential of the Corporate Sustainability Due Diligence Directive and make sustainable executive remuneration one of its’  spearheads.

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Credits
Frederic Barge

Frederic Barge is the founder of Reward Value Foundation, a not-for-profit research initiative that specialises in executive remuneration. Frederic is a former KPMG partner and HR executive at large organisations, Frederic has held a number of global positions for businesses and institutions at management and supervisory level on executive remuneration. He is a published author and recognised thought leader, who actively participates in sector discussions in the financial services industry in light of the guidelines from regulatory bodies on compensation, with particular expertise in Executive remuneration, Private Equity compensation programs, Equity plans, Corporate governance, HR aspects in M&A transactions, Performance assessment.

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