Financial institutions are increasingly linking climate-related metrics in remuneration frameworks to their strategies and external commitments. Our 2022 report on global trends in ESG incentives (which can be found HERE) shows that 42% of companies in the financial services sector use environmental measures in incentive plans, up from 23% in 2021.

The global bank regulator, the Financial Stability Board (FSB), recently asked banks, insurance companies and asset management firms globally how they incorporate climate-related financial risk factors in remuneration frameworks. For APRA regulated entities this may serve as a checklist against a global benchmark.

Below is a summary of key findings from their report.

Climate-related metrics used by financial institutions

The practice for implementing climate metrics in remuneration frameworks varies, with targets incorporated primarily in STI plans and to a lesser degree in LTI plans.

Examples of climate-related metrics in incentive plans include:

• Reductions of own carbon footprint
• Provision of sustainable finance and products
• Accountability for climate-related leadership, training, innovation and disclosures
• External-based metrics such as ESG ratings and indices to benchmark against peers
• Risk management. However, the focus is on process and compliance instead of quantitative metrics relating to the impact of climate change. FSB suggests this may be because methodologies to quantify risks (e.g., scenario analysis) are not yet well established.

Guerdon Associates’ database shows that climate-related metrics do not feature in Australian domiciled and listed financial institutions’ remuneration frameworks (the ASX listed but UK domiciled Virgin Money has incentive climate measures). Global peers are further ahead.

Challenges

The report highlights several challenges when including climate-related metrics in remuneration frameworks:

• Gaps in the availability and reliability of data make it difficult to apply consistent metrics and monitor them in performance evaluation;
• Difficulty in developing meaningful metrics that are relevant to and aligned with strategies and that are also objectively quantifiable and measurable; and
• Misalignment of timing between the performance measurement period and the achievement of climate-related targets.

Participants in FSB’s survey also noted the lack of consistency around the metrics used as financial institutions use metrics that are relevant to their business. They noted that there is a danger of “cherry-picking” climate-related metrics which they would achieve or deliver anyway. There is also a risk that institutions reward for intention instead of impact which may lead to higher levels of variable pay without achieving progress against the original strategy on climate.

The FSB report can be found HERE.

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