ESG, Climate Risk Executive Compensation Link Urged by Global Financial Regulatory Panel
December 17, 2016
Demonstrating that Environment Social and Governance issues are beginning to receive attention from mainstream governmental organizations, this week, the 32-member “Task Force on Climate-Related Financial Disclosures” established by Financial Stability Board and led by former New York City Mayor Michael Bloomberg, delivered a report urging the Group of 20 nations to consider implementing greater public disclosures informing investors how executive compensation policies are linked to climate changer risks. The Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system. The panel, which was established by the FSB’s Chairman, Bank of England Governor Mark Carney, was asked to develop voluntary, consistent climate-related financial disclosures that would be useful to investors, lenders, and insurance underwriters in understanding material risks.
The report made four primary recommendations on disclosure of climate-related disclosures.
Adoptable by all organizations
Included in public financial filings
Designed to solicit decision-useful, forward-looking information on financial impacts
Strong focus on risks and opportunities related to transition to lower-carbon economy
The panel focused heavily on energy companies, and recommended that executive compensation programs consider how pollution laws, extreme weather events and the reduction of fossil fuel use could impact stakeholders. Further, the report urged companies, specifically energy companies, which it noted are responsible for about 60 percent of global emissions, to consider detailing how executive and board member pay is tied to climate risk. A Bloomberg News story echoes the report’s conclusion that the report might be adopted into law by some G-20 countries and that the report recommends companies use scenarios to investigate how they would be impacted by targets to cut greenhouse gases. The report states that investors, lenders and other large asset owners, “have an important role to play in influencing the organizations in which they invest to provide better climate-related financial disclosures.” It can be anticipated that there will be pressure for countries to adopt the recommendations in their financial disclosures, and that certain advocacy-oriented investors may use them in shareholder proposals.