CMS Expert Guide to ESG Compensation in Spain

The Good Governance Code of Listed Companies is a non-binding regulation that contains provisions aimed at ensuring the proper functioning of the governing and administrative bodies of Spanish companies in order to maximise competitiveness, build trust and transparency for shareholders and domestic and foreign investors, improve internal control and corporate responsibility systems, and ensure the correct internal distribution of functions, duties and responsibilities while maintaining standards of maximum rigor and professionalism.

In particular, this Code contains some recommendations (i.e. 53, 54 and 55) related to ESG criteria to be considered in remuneration systems for executive directors.

The Spanish Companies Act regulates the remuneration of directors; however, it does not contain any specific provisions on ESG criteria or obligations in relation to such remuneration.

From a financial perspective, the EU Sustainable Finance Disclosure Regulation 2019/2088 (“SFDR”) requires some financial institutions to ensure that their remuneration policies promote effective sustainability management and provides that such financial institutions disclose their remuneration policies, including the extent to which they address sustainability risks.

• The Good Governance Code of Listed Companies applies to all listed companies.
• The Spanish Companies Act regulates all types of companies subject to Spanish Law.
• The SFDR concerns the financial industry, such as credit institutions and investment firms acting as portfolio managers or investment advisors, fund management companies, etc.

The Good Governance Code of Listed Companies does not regulate specific pillars, but one principle states that listed companies should adopt an appropriate environmental and social sustainability policy as a non-delegable board power, and report transparently and in sufficient detail on its development, application, and results.

A recommendation of the Good Governance Code of Listed Companies also states that variable remuneration should promote the long-term sustainability of the company and incorporate non-financial criteria relevant to the company’s long-term value creation, such as compliance with its internal rules and procedures and its risk control and management policies.

Furthermore, the SFDR states in its Article 5 that financial market participants should indicate in their remuneration policies the extent to which they are consistent with the inclusion of sustainability risks and publish this information on their websites. It does not explicitly distinguish between "E", "S” and "G".

According to the Good Governance Code of Listed Companies, directors should adopt an appropriate environmental and social sustainability policy as a non-delegable board power, and report transparently and in sufficient detail on its development, application, and results. This environmental and social sustainability policy should, at a minimum, identify and include the following:

1. The principles, commitments, objectives, and strategies relating to shareholders, employees, clients, suppliers, social welfare issues, the environment, diversity, fiscal responsibility, respect for human rights and the prevention of corruption and other illegal conducts.
2. The methods or systems for monitoring compliance with policies, associated risks, and their management.
3. The mechanisms for monitoring non-financial risks, including those related to ethics and business conduct.
4. Channels for stakeholder communication, participation, and dialogue.
5. Responsible communication practices that prevent the manipulation of information and protect the company’s honour and integrity.

The Spanish Companies Act also states in Article 529 novodecies 3.d) that when companies grant variable remuneration to the directors, they must establish clear criteria for it, including criteria related to the company’s social responsibility.

According to market practice, there is no distinction between directors (business relationship) and top management employees (special employment relationship).

There are no regulations in Spain governing ESG obligations for non-executive employees' remuneration.

It is mandatory for companies in Spain to implement a gender pay register. This system will include the difference between the average (mean and median) salaries of men and women, broken down into professional groups. This information should be updated annually. If the difference in gap between men and women is 25% or more, the company should take action to eliminate it.

No other requirements are provided.

The Good Governance Code of Listed Companies sets out the following conditions that should be met for variable remuneration:

• Variable remuneration should be linked to predetermined and measurable performance criteria that factor in the risk taken to achieve a specific outcome.
• Variable remuneration should promote the long-term sustainability of the company and include non-financial criteria relevant to the company’s long-term value creation, such as compliance with its internal rules and procedures and its risk control and management policies.
• Variable remuneration should be focused on achieving a balance between the delivery of short, medium, and long-term objectives, so that performance-related pay rewards continuous performance maintained over a sufficient period of time to recognise its contribution to long-term value creation. This will ensure that performance measurement is not based solely on one-off, occasional or exceptional events.

It also specifies that the payment of variable remuneration components should be subject to sufficient verification that the previously defined performance has actually been achieved. Entities should include in their annual directors' remuneration report the criteria relating to the time required and methods for such verification, depending on the nature and characteristics of each variable component.

Additionally, entities should consider introducing a reduction clause (‘malus’) based on deferral of the payment of part of the variable components for a sufficient period, which implies total or partial loss of this remuneration if an event occurs prior to the time of payment that makes this advisable.

Finally, the Good Governance Code of Listed Companies also establishes that remuneration linked to company earnings should bear in mind any qualifications stated in the external auditor’s report that reduce their amount.

No. There are currently no rules or official guidelines in Spain concerning the targets to be met in relation to ESG KPIs.

Each company can individually set out ESG criteria that it considers appropriate. However, it’s true that the general rule is that companies link these criteria to environmental, social, and corporate governance factors, as explained in Question 13.

As mentioned above, the Good Governance Code of Listed Companies is a non-binding regulation (soft law) that indicates how listed companies should be governed. This includes directors' remuneration and ESG provisions that listed companies should comply with.

Yes, as regards the financial sector, the Spanish National Securities Market Commission (known by its acronym in Spanish as “CNMV”) has issued some guidance on the SFDR, which relate, amongst other things, to the remuneration policies of entities falling within the scope of the SFDR.

There is an increasing demand for information on what companies are doing in terms of ESG. Therefore, in line with market pressure on responsible corporate behaviour, the most common metrics that enable comparable ESG KPI reports for different regions and sectors are described as follows:

Planet (environment)

• Number and size of sites owned, leased, managed or adjacent to key biodiversity or protected areas;
• CO2 emissions;
• Litres of water consumed.

Employees

• Diversity and inclusion: percentage of employees in each group category, including various indicators such as age, gender, etc;
• Pay equity: base salary/remuneration of each professional group.

Governance

• (Internal/external mechanisms for seeking advice and reporting concerns about ethical/unethical behaviour;
• Anti-corruption training, number/nature of incidents and stakeholder initiatives/commitment to combat corruption;
• Composition and diversity of boards of directors.

Both. Even though ESG KPIs are designed to help guide the business community's transition from short-term, quarterly  financial performance to a broader, long-term focus.

In Spain, 51% of S&P 500 companies already have ESG metrics in their annual variable remuneration plans, with a weighting between 15% and 20% of the total annual variable remuneration. For Ibex 35 companies, this percentage rises to almost 80%, with a weighting between 10% and 30% of total annual variable remuneration.

Spanish companies must include a statement of non-financial information in the management report when at least two of the following circumstances apply:

• The average number of employees employed during the fiscal year exceeds 500.
• The company is considered a public interest entity.
• If two of the following apply:

1. The total assets exceed EUR 20,000,000.
2. The net amount of annual turnover exceeds EUR 40,000,000.
3. The average number of employees employed during the fiscal year exceeds 250.

Furthermore, listed companies must approve a remuneration policy of directors every three years and an annual remuneration report including all the remuneration accrued by the directors during the previous fiscal year and the expected remuneration to be accrued during the current year.

Furthermore, Article 5 of the SFDR requires financial market participants to  indicate, as part of their remuneration policy, the extent to which it is consistent with the inclusion of sustainability risks and publish this information on their websites.

The provisions described do not overrule or change existing employment or civil law agreements.

The CNMV monitors compliance with the SFDR. The CNMV can take necessary measures to enforce compliance in relation to financial institutions under the scope of the SFDR (credit institutions, investment firms, investment advisors, fund management companies, etc.).

The CNMV is committed to promoting initiatives that facilitate the sustainable growth of our companies and our economy. For this reason, one of the four strategic lines defined by the CNMV for the period 2021-2022 is specifically to facilitate the role of the securities market in this transition.

In addition, the CNMV has published the following regulatory initiatives (with its criteria in this respect) to integrate environmental, social and governance considerations with the aim of achieving a resource-efficient and sustainable economy:

CNMV: Q&A on sustainability regulation applicable to financial products: Regulation 2019/2088 (Disclosure Regulation) and Regulation 2020/852 (Taxonomy), (June 2021).

Communication on the forthcoming implementation of Regulation 2019/2088 on sustainability disclosures in the financial sector, (February 2021).