CMS Expert Guide to ESG Compensation in Bulgaria

The Accountancy Act implements the provisions of Directive 2013/34/EU and Directive 2014/95/EU, which amends Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large enterprises and groups.

Large enterprises with more than 500 employees must include as part of their annual activity reports a non-financial statement that includes ESG issues (but not specifically in relation to remuneration).

Furthermore, the Accountancy Act requires enterprises (except for micro and small enterprises that are not subject to independent financial auditing) to prepare and publish annual activity reports that must include, among other things, an analysis of non-financial key performance indicators relevant to the business, including information on environmental and employee issues.

Separately, there are specific laws applicable to companies in the financial sector, which impose requirements and obligations with respect to (i) the remuneration of members of the management and control bodies and/or certain non-executive staff; and (ii) the adoption, implementation and disclosure of remuneration policies for the remuneration of members of the management and control bodies and/or certain non-executive staff. These laws include the Credit Institutions Act, the Public Offering of Securities Act, the Insurance Code, the Collective Investment Schemes and Other Undertakings for Collective Investments Act, the Social Insurance Code, and the Markets in Financial Instruments Act. More detailed provisions on the content, preparation, adoption and disclosure of the remuneration policies under these laws are provided by Ordinance No. 48 dated 20.03.2013 on remuneration requirements, adopted by the Bulgarian Financial Supervision Commission, Ordinance No. 4 of 21.12.2010 on requirements for remuneration in banks, adopted by the Bulgarian National Bank and Ordinance No. 50 of 30.03.2022 on capital adequacy, liquidity of investment intermediaries and supervision of their compliance, adopted by the Bulgarian Financial Supervision Commission.

The specific laws also provide for a number of obligations related to transparency, accountability, and security (including in the form of reporting on the implementation of the remuneration policies).

Regulation (EU) 2019/2088 (the SFDR Regulation) provides that certain companies in the financial industry must disclose their remuneration policies, including the extent to which they address sustainability risks.

The obligations under the Accountancy Act apply regardless of the sectors/industries in which the enterprises operate. The obligation to prepare and publish a non-financial statement applies to large public interest entities that (as of 31 December of the reporting period) have an average number of employees exceeding 500. The annual activity reports must be prepared and published by all enterprises (except for micro and small enterprises that are not subject to an independent financial audit).

Specific obligations relating to remuneration and remuneration policies apply to certain types of companies in the financial sector:

• Public companies
• Insurance and reinsurance companies
• Investment companies managing collective investments schemes
• Supplementary social insurance companies
• investment intermediaries

Banks and other companies in the financial sector

The regulations listed in section 1 cover the “environmental”, “social” and “governance” pillars of the reviewed legislation.

The Accountancy Act requires enterprises to prepare and publish annual activity reports that must include information on environmental and employee issues.

The non-financial statements under the Accountancy Act must include the information necessary to understand the development, results, condition of the enterprise and the impact of its activities, at least in relation to environmental and social matters and employee issues, respect for human rights, the fight against corruption and bribery.

The specific laws for the financial sector (as described in section 1) set requirements for the adoption, implementation and disclosure of remuneration policies. Remuneration will be determined by specific company bodies. This relates to ESG issues, as far as they are included in the remuneration system. Transparency, accountability, and security requirements under sector-specific laws also relate to the governance pillar.

Under the SFDR Regulation, the financial market participants and financial advisors are required to indicate, in the context of their remuneration policy, to what extent it is consistent with the inclusion of sustainability risks and publish this information on their websites. It does not explicitly distinguish between the three ESG pillars.

Here is a summary:

• Managing ESG risks through adoption, implementation, and disclosure of remuneration policies
• Reporting obligations (including as regards implementation of remuneration policies and other documents/events)

Publishing of annual activity reports and non-financial statements

In general, the same requirements apply to the remuneration of executive and, if any, non-executive staff.

Under the Public Offering of Securities Act, each member of the management/control bodies of public companies are required to provide a guarantee for their management functions. The amount of the guarantee is determined by the general meeting of shareholders and cannot be less than the 3-month gross remuneration of the member concerned. There are no such requirements under the Public Offering of Securities Act applicable to non-executive staff.

As regards liability, directors could generally be liable for breaches of the statutory ESG requirements (as part of their general duties as directors). Liability of top management employees could be engaged in limited cases. However, members of the top management (in their capacity as employees) could also bear disciplinary and/or financial liability for breaching their employment obligations concerning compliance with the ESG requirements.

Public companies, insurance and reinsurance companies, investment companies, collective investment managers, supplementary social insurance companies, investment intermediaries and banks have obligations to adopt, implement and disclose remuneration policies that apply to executive and certain non-executive staff.

The remuneration policies provide that both executive and non-executive staff covered by such policies must repay, in whole or in part, variable remuneration granted based on data that has subsequently proven to be false or misleading.

The non-ESG-specific labour and anti-discrimination laws provide the general principle that equal remuneration must be paid for equal or equivalent work. No unfavourable treatment (including as regards remuneration) is permitted based on characteristics protected against discrimination.

Pursuant to the applicable regulations, the assessment criteria and procedures, as well as any amendments to them, must be drawn up in writing and brought to the attention of the employees concerned when they take up the relevant position and in the event of any subsequent changes. This is particularly relevant for variable remuneration as part of the remuneration schemes applicable in the company.

There are specific provisions applicable to banks and investment intermediaries, which require their remuneration policies to be gender-neutral. Information regarding compliance with this requirement and equality of pay between men and women must be made publicly available. 

The requirements applicable to the remuneration schemes vary slightly for the different types of entities covered in the financial sector.

In general terms, the directors and the non-executive staff covered by the remuneration policies may be paid both fixed and variable remuneration. The remuneration policies must specify an appropriate ratio between these two general types of remuneration, depending on the category of employee. The remuneration policies must also specify an upper limit for variable remuneration for each category of employee. The fixed remuneration must represent a large enough proportion of the total remuneration to allow for a flexible policy concerning  variable remuneration. The criteria for entitlement to variable remuneration must be specified in the remuneration policies and must be objective and fair.

There are requirements for deferred payment of variable remuneration and the terms of its payment. These requirements may vary slightly for different entities.

There are currently no statutory rules or official guidelines regarding specific ESG KPIs.

There are no widespread market practices at this stage. Such criteria are not consistent, and if there are any at all, they are usually applied by large Bulgarian companies or mainly subsidiaries of large multinational companies.

The leading sectors in implementing such practices are retail and consumer goods, followed by industrial manufacturing, automotive, TMC, and financial services.

If a company has any such ESG criteria for executive remuneration, they are usually derived from self-regulation such as internal bonus rules, internal labour rules, and similar, which are established on a global level for all subsidiaries within the group.

• "S" and "G" similarly relevant in all sectors
• "E" depending on specific risks related to the different sectors.

Environment

1. Improvement of energy efficiency and implementation of best practices for energy saving
2. Waste management
3. Reduction of CO2 emissions (with a focus on transport solutions)
4. Use of renewable/green energy
5. Increase in the share of sustainable products

Social

1. Diversity and inclusion
2. Equal pay
3. Social benefits
4. Workplace safety and health
5. Training, education, and further certification of employees

Governance

1. Corporate social responsibility
2. Selection of suppliers (with a focus on sustainable practices)
3. Reporting (including implementation of whistleblowing systems)
4. Compliance
5. Prevention of corruption and bribery
6. Risk management

Usually, ESG KPIs (if there are any such criteria) are long term. Very often "Environment" goals are set for ten to twenty years in the future, whereas "Social" and "Governance" goals are set for a shorter timeframe of one to five years.

It varies between 10% - 25%.

Please refer to Questions 1 and 4.

The provisions described do not overrule or automatically change existing agreements.

Overview of compliance with EU "Disclosure" Regulation 2019/2088 is performed by the deputy president of the Bulgarian Financial Supervision Commission.

The new drafts of the European Corporate Sustainability Reporting Directive (COM/2021/189) as well as the Corporate Sustainability Due Diligence Directive (COM/2022/71) indicate that there will be stricter ESG rules introduced in the future. So far, there have been no draft laws implementing them into Bulgarian law.