CMS Expert Guide to ESG Compensation in Romania

The EU "Disclosure" Regulation No. 2019/2088 requires certain companies in the financial services sector to disclose their remuneration policies, including the extent to which they address sustainability risks.

The Non-Financial Reporting Directive (NFRD) – as transposed via Ministry of Finance orders, respectively:

• Order No. 1938/2016 published in September 2016 and
• Order No. 3456/2018 published in November 2018.

According to the above orders, non-financial reporting should include a brief description of the company's business model; of the policies and their results regarding environmental, social and labour aspects, human rights and the fight against corruption, the main risks and the necessary due diligence procedures as well as relevant KPIs. If the company does not have a policy on the above-mentioned aspects, it should explain this according to the "comply or justify" principle.

In addition, companies must provide information on their diversity policy regarding administrative, management and supervisory bodies, covering aspects such as age, gender, educational and professional experience. Disclosures should also include policy objectives, information on how the policy is implemented and the results achieved over the reporting period. If the company has not adopted a diversity policy, a clear explanation should be provided to justify this.

Law No. 24/2017 - on issuance of financial instruments and market operations, as subsequently amended and supplemented, establishes rules concerning the exercise of certain rights of shareholders and their long-term participation in issuing entities whose shares are admitted to trading on a regulated market.

Such entities will establish a remuneration policy for their executives on which shareholders are entitled to vote via their ordinary general meeting.

Companies’ Law No. 31/1990

The companies’ law states that the remuneration of the management board/ supervisory board members must be determined in the articles of association or by resolution of the general meeting of shareholders.

The additional remuneration of directors and other board members is generally determined by the administrative board or the supervisory board in line with the general limits on remuneration which are set by the shareholders. Any other benefits may only be granted only in accordance with the aforementioned limits and companies’ articles of association.

EU "Disclosure" Regulation 2019/2088 concerns the financial industry, for instance AIFMs (Alternative Investment Fund Managers –defined as an entity that provides at least portfolio management and risk management services to one or more AIFs as its regular business activity, irrespective of where the AIFs are located or what legal form the AIFM takes), companies managing qualified venture capital funds or qualified social entrepreneurship funds, etc.

NFRD (the Non-Financial Reporting Directive) - Order No. 1938/2016 and Order No. 3456/2018 concern all companies that, on an individual or consolidated level, have an average of more than 500 employees (regardless of whether they are public entities or not). This includes European companies that have their headquarters in Romania and branches of foreign companies that are officially registered in Romania.

Law No. 24/2017 concerns the issuers of financial instruments and market operations, listed stock companies.

Companies Law No. 31/1990 concerns all the incorporated companies in Romania.

The EU "Disclosure" Regulation 2019/2088 requires financial market participants and financial advisors to disclose, as part of their remuneration policy, to what extent this is consistent with the inclusion of sustainability risks and publish this information on their websites. It does not explicitly distinguish between "E", "S" and "G" elements in relation to ESG.

NFRD - Order No. 1938/2016 and Order No. 3456/2018 refer to a brief description of the company's business model, policies and their outcomes in relation to, amongst others, environmental, social and labour aspects, human rights, and the fight against corruption, the main risks and the necessary due diligence procedures, as well as the relevant KPIs. Thus, it refers to specifically to “E”, “S” and “G”.

Law No. 24/2017 refers to element “G” (governance), when addressing that the issuer of financial instruments and market operations shall establish a remuneration policy in respect of the executives.

Companies Law No. 31/1990 refers to “G” when it comes to the remuneration of the members of the management board or the supervisory board.

Amongst the obligations incumbent upon the company’s directors/top management in this regard, we identify reporting obligations, designing of remuneration policies including ESG components, promotion of effective management of ESG risks in remuneration policies, and other related aspects.

As a general principle, directors are responsible for ensuring that the company meets its legal obligations as per their mandate and law. This may also include legal obligations deriving from the context of ESG.

The liability of designated/mandated employees is governed by their respective employment contracts, resulting in a rather limited and only subsidiary responsibility set-up. Therefore, it is rather unlikely and rather exceptional in the current context that employees (even with managerial responsibilities) can be held liable for the company not meeting the ESG requirements.

N/A - there are no requirements governing ESG obligations for non-executive employee remuneration. However, in practice, executive employee obligations are at least partially passed on (usually via KPIs) to non-executive employees so as to ensure the achievement of the related objectives in a coherent manner across the relevant functions in the organisational structure (such as environmental department, diversity and inclusion, human resources, top down).

N/A - there are currently no ESG-specific requirements in terms of addressing the gap between executive and workforce remuneration and/or executive gender pay gap, except for general legal rules on anti-discrimination, relevant case law and self-imposed rules.

According to such rules, any direct or indirect discrimination against an employee, discrimination by association, harassment based on race, nationality, ethnicity, colour, language, religion, social origin, genetic features, sex etc, is prohibited. Unless a provision, measure, criterion, or practice is objectively justified by a legitimate aim (and only to the extent that the means of achieving that aim are proportionate, appropriate, and necessary), it cannot be applied differently from one individual to another.

It is also worth mentioning that Romania had notably one of the lowest unadjusted gender pay gaps in the European Union in 2020, at 2.4%, according to a report published by Eurostat.

N/A – there are no prescribed remuneration schemes in relation to ESG in such level of detail to date.

At the level of Romania, there are currently no legal rules regarding specific ESG KPIs. The ESG KPIs may vary significantly from one company to another. 

At EU level, the Communication from the Commission 2017/C 215/01, Guidelines on non-financial reporting (methodology for reporting non-financial information) may be considered also for Romania.

Market trends are still emerging and vary widely from one company to another. However, most of the international companies apply the agreed sustainability standards and related remuneration principles at group level.

Certain ad hoc guidelines and orientations started to emerge a couple of years ago (on a voluntary basis) as industry sustainability principles, voluntarily set objectives and environmentally conscious management became very popular (since it was considered to boost growth and generate a better image/branding for companies in the underlying sectors).

In addition, the Communication from the Commission — Guidelines on non-financial reporting (methodology for reporting non-financial information) is also considered by Romanian entities as an example of reporting on ESG matters.   

Moreover, the Bucharest Stock Exchange took the initiative to capitalise on the opportunities of integration of environmental, social and governance (ESG) criteria. To this end, a voluntary (non-mandatory) guidance on ESG reporting was issued by this entity to support Romanian companies listed on the stock exchange and the business community in general. The extent to which these voluntary rules are adopted has yet to be determined.

Practices vary by industry/sector. In highly regulated fields of activity, such as banking and finance, the optics are much stricter, along with legal reporting obligations, more detailed standards/ policies (even self-imposed) and expectations.

Industrial sectors that have an environmental impact also have highly regulated technical standards and rules to ensure protection, including those arising from the circular economy package.

In addition to the obligations arising from the ESG criteria, from an environmental perspective, companies covered by industrial emissions legislation (authorized under integrated pollution prevention and control framework) were and are still required to publish an annual report to ensure public access to environmental information.

Environment

• Developing new climate-friendly products and services
• Better/enhanced waste management practices and infrastructure
• Reduction of carbon emissions
• Increased use of renewable/green energy
• Improvement of energy efficiency
• Use of sustainable materials
• Green financing commitments
• Food waste reduction initiatives

Social

• Employee and customer satisfaction
• Diversity and inclusion
• Workplace safety and health
• Investing in training and further education
• Investing in communities
• Increasing leadership diversity
• Occupational health and safety
• Education and training
• Data protection & IT security

Governance

• Compliance
• Prevention of corruption and anti-bribery
• Enhanced risk management solutions
• Reporting and communication (including whistleblowing)

As mentioned above, there is no clear trend in this regard to date.

Generally, however, board members tend to expect increasing incorporation of ESG measures into long-term incentive plans in the years ahead. It is also accepted that some ESG objectives may only be implemented in the medium to long term.

In conclusion, remuneration is most likely to reflect KPIs and management expectations.

The stand-alone ESG metrics have a clear link to remuneration but seem to be more appropriate for companies where there are only a small number of ESG material factors to consider, while for other companies where more factors are at play, a separate ESG scorecard with multiple metrics may be the right way to handle them.

Studies show that most board members find it challenging to choose the most suitable ESG metrics from a wide range of options. As this can hardly be considered an easy exercise, it is mandatory to identify the metrics that are linked to the company’s purpose and the ones that truly create long-term, sustainable value for the company.

However, linking ESG and executive compensation is still debatable from a cultural perspective, since the topic is still evolving.

To date, there are no ESG disclosure requirements other than those mentioned above (these will most probably be formulated in more detail once the CSRD Directive is implemented in Romania).

N/A - Based on current practice and context, there is no clear-cut rule on this.

Currently, there is no single specific ESG reporting authority. However, there is an obligation for companies to report the environmentally linked information to relevant environmental authorities (at local and/or central level, as the case may be) on an annual basis.

Monitoring of compliance with NFRD provisions is carried out by the Ministry of Finance and the Financial Supervisory Authority, while the monitoring of environmental protection measures is carried out by commissioners and authorised persons at the level of the National Environmental Guard.

As the CSRD has recently been adopted at EU level, the Ministry of Environment, Waters and Forests will most likely prepare a draft legal act in order to implement the CSRD alongside other relevant authorities.