CMS Expert Guide to ESG Compensation in Netherlands

In April 2021, the European Union adopted the Corporate Sustainability Reporting Directive (CSRD). From 2024, companies with 250 or more employees will be obliged to report on the impact of their activities on people and the environment. In the report, organisations must consider their impact on climate, biodiversity, and human rights, among others. An ESG report mainly deals with the 'non-financial' figures.

Following the CSRD, there has been a legislative change within Dutch Law. The bill "Promoting long-term shareholder engagement" entered into force in 2019 and amended, among others, the Dutch Civil Code 2 (in Dutch: Burgerlijk Wetboek 2) and the Financial Supervision Act (in Dutch: Wet op het Financieel Toezicht).

With this legislative amendment, Article 2:135a was inserted into the Civil Code. This article deals with the remuneration of listed companies. The remuneration policy is adopted once every four years by the general meeting of shareholders. If the company has a works council, the remuneration policy must first be submitted to the works council for consultation. The remuneration policy must be clear and comprehensible and contain at least, among other things, an explanation as to how the remuneration policy contributes to the company's business strategy, long-term interest and sustainability.

Furthermore, the Corporate Governance Code (CGC) also contains provisions on ESG criteria. On 20 December 2022, the Corporate Governance Code Monitoring Commission updated the CGC. The Corporate Governance Code includes a chapter on executive remuneration. The executive remuneration policy is clear and comprehensible, focuses on long-term value creation of the company and its related business, and takes into account the internal remuneration relationships within the company. In achieving long-term value, consideration is given to other business aspects relevant to the company and its affiliated enterprises, such as environmental, social and personnel matters, the chain in which the company operates, respect for human rights and the fight against corruption and bribery, which is in line with ESG criteria (see 1.1.1 of the Code).

Both Article 2:135a Civil Code and the CGC cover all listed companies in the Netherlands. In practice, however, the scope and coverage of the Code is often broader and extends to non-listed companies.

No specific pillars (E, S or G) are mentioned in the above schemes. However, there are general references to sustainability and social issues, such as equality.

There are, however, separate (future) laws in addition to the regulations mentioned above that specifically regulate one of the pillars of ESG. Reference is made to, for example, the initiative bill "Equal pay for women and men". This bill can be categorised under the S pillar. Or, for example, the obligation for large employers to report the CO2 emissions of their employees to the government to measure whether the emissions go above the so-called CO2 ceiling and to reduce emissions where necessary. This can be categorised under the E pillar.

No specific obligations are created that describe any of the pillars. However, there is a general obligation to consider sustainability, the environment, social issues, and personnel matters when drafting policies.

Not by law, but in practice, directors and top management employees often have different targets as their responsibilities and areas of control differ.

There are no statutory regulations in the Netherlands governing ESG obligations for employee’s remuneration who are not directors and top management.

There are currently no legal requirements specifically aimed at addressing the pay gap between executive and workforce remuneration. Nevertheless, sectorial regulations define minimum remuneration per sector.

The gender pay gap is addressed with the initiative bill "Equal pay for women and men". The initiative bill aims to ensure an end to the gender pay gap. Companies with more than 50 employees will be obliged to disclose the pay gap between women and men in comparable positions to the works council and in the management report. The bill is now subject to debate. It does not specifically address the relationship between directors and other employees, but it is a general requirement.

In the Netherlands, there are no prescribed remuneration schemes in relation to ESG.

No. There are currently no legal rules regarding specific ESG KPIs, which vary significantly from company to company.

Although in principle it is not a hard criterion, except for the general obligations mentioned in question 1, to link executive remuneration to specific ESG pillars, we see in practice that this does indeed happen in the Netherlands. Research showed that 58% of Dutch listed companies included sustainable ESG pillars as a criterion in the executive remuneration structure last year. This is the highest percentage in Europe.

Listed companies must comply with the regulations explained in question 1. Besides this, including ESG criteria in your executive remuneration policies is voluntary.

Of course, there are other regulations for companies to comply with regarding ESG, but these do not address remuneration. Therefore, these are not covered now.

We do not have an overview of what kind of companies have included ESG criteria in their executive remuneration policies. Therefore, we cannot say that one sector invests more in this area than another.

Environment

• Reduction of CO2 emissions
• Reduction of the CO2-intensity of the company's portfolio
• Use of renewable/green energy
• Improvement of energy efficiency
• Increase of the share of sustainable products
• Use of sustainable materials in production

Social

• Employee satisfaction
• Customer satisfaction
• Diversity and inclusion
• Workplace safety and health
• Employee turnover
• Training and further education

Governance

• Compliance
• Prevention of corruption and bribery
• Risk management
• Reporting and communication

In both.

This varies depending on company and industry.

In the remuneration report, the supervisory board gives an informative account of the implementation of the remuneration policy. The report is posted on the company's website.

The remuneration committee prepares the remuneration report. In addition to what is required by law, the report must in any case provide information on the following:

• how the remuneration policy was put into practice during the past financial year;
• how the implementation of the remuneration policy contributes to sustainable, long-term value creation;
• how scenario analyses were considered;
• the remuneration relationships within the company and its affiliated enterprises and, if applicable, the changes in these relationships compared to at least five previous financial years;
• if a management board member receives variable remuneration, how this remuneration contributes to sustainable long-term value creation, on which predefined and measurable performance criteria the variable remuneration depends and how the remuneration relates to performance; and
• if an executive board member or former executive board member receives severance pay, the reason for this payment.

This is stated in the CGC.

These rules for publishing the remuneration policy already existed.

There is no specific body overseeing compliance with ESG criteria in executive remuneration.

In the financial sector, however, the Dutch Bank has oversight. Furthermore, the Authority for the Financial Markets (AFM) is the behavioural regulator of the financial markets. This means that the AFM monitors the behaviour of the entire financial market sector.

On 10 March 2021, the Sustainable Finance Disclosure Regulation (SADR) came into force. The SFDR extends to financial market participants and financial advisors. This basically covers all asset managers. The SFDR aims to implement a harmonised framework for disclosure on sustainability aspects of financial products with an investment component. The SFDR contains a transparency obligation requiring financial market participants to publish information on their websites about how sustainability risks are integrated into their investment procedures.  This aims to protect investors so that they can make an informed investment decision.

The Taxonomy Regulation was published on 22 June 2020, part of which came into force on 1 January 2022. The remaining part will come into force from 1 January 2023. The regulation creates a framework of criteria for determining which economic investments are environmentally sustainable or not. The regulation creates a classification system that indicates whether an investment is environmentally sustainable or not.

The disclosure requirements under the Taxonomy Regulation and the SFDR are detailed in the Regulatory Technical Standards (SFDR RTS).  The purpose of the SFDR RTS is to create a single rulebook for sustainability reporting by explaining the generally formulated obligations under the above regulations. The SFDR RTS are in force as of 1 January 2023.