CMS Expert Guide to ESG Compensation in United Kingdom

LR 9.8.6R(8) of the UK Listing Rules - a company with a UK premium listing is required to include a statement in its annual report on the extent to which the disclosures therein, including remuneration disclosures, are consistent with the recommendations of the Taskforce on Climate-Related Financial Disclosures.

The Sustainable Finance Disclosure Regulation (SFDR) requires some financial institutions to ensure that their remuneration policies promote effective management with respect to sustainability risks. While the SFDR has not been adopted into UK law post Brexit, it could still be relevant for financial institutions operating throughout the EU while other companies may choose to use it as a guide for determining their disclosures.

Guides/Codes

UK Stewardship Guide - sets out standards for some financial institutions when considering and reporting on remuneration (among other things) and requires signatory institutions to systematically integrate stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfil their responsibilities.

The UK Corporate Governance Code - the UK Corporate Governance Code states that sustainability should be meaningfully addressed by requiring the remuneration policies and practices of companies with a premium listing, whether incorporated in the UK or elsewhere, to be designed to support strategy and promote long-term sustainable success.  Additionally, it requires a company with a premium listing to establish formal and transparent procedures for developing remuneration policies and determining remuneration. Directors of such companies must also exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances.

The Investment Association’s Principles of Remuneration state that remuneration committees should consider including strategic or non-financial performance criteria in variable remuneration, for example relating to ESG objectives, and that they should be material to the business and quantifiable.

Task Force on Climate-related Financial Disclosures - Guidance on Metrics, Targets, and Transition Plans. This provides guidance for companies preparing their annual reports on disclosure of metrics, targets, and climate transition plans, including guidance on climate-related metrics and how they link to executive remuneration.

ISS - United Kingdom and Ireland - Proxy Voting Guidelines Benchmark Policy Recommendations. This was published in December 2022 by the Institutional Shareholder Services (ISS) and includes a requirement that the remuneration committee should disclose how it has taken into account any relevant ESG matters when determining remuneration outcomes. Any ESG targets should be material to the business and quantifiable, with a clear link to the company’s strategy. Such factors may include (but are not limited to): workplace fatalities and injuries, significant environmental incidents, large or serial fines or sanctions from regulatory bodies and/or significant adverse legal judgments or settlements.

Pensions and Lifetime Savings Association (PLSA) Stewardship and Voting Guidelines 2022 (PLSA Guidelines)

The PLSA Guidelines state that “it’s no longer the case that climate considerations can be considered a ‘nice to have’ for companies, and investors now expect that disclosure, monitoring, assessment, and oversight of risks is considered a priority”. The PLSA Guidelines state that the PLSA believes that the remuneration policy should be clearly linked to incentivising behaviours that are consistent with the company’s purpose and values. This should include performance on environmental and social issues and should demonstrate some recognition of wider societal expectations, the general economic environment, and the returns to long-term shareholders. The PLSA states that remuneration committees should use the company’s strategic plan and KPIs as a starting point and ensure there is a strong alignment between the company’s strategy and the drivers of executive remuneration.

Mostly financial services (but can cover any sector).

Mostly E, but also S and G, although they often overlap. 

See above. Here is a summary:

• To report against ESG measures in annual reports on remuneration
• To promote effective management of ESG risks in remuneration policies
• To design remuneration policies which consider ESG components
• To take ESG considerations into account when determining and authorising remuneration 
• For remuneration committees to consider including ESG-related KPIs

In the financial services sector, certain firms that are authorised by the FCA and/or PRA in the UK (such as banks, building societies, asset managers and investment firms) will be subject to specific remuneration rules applied through remuneration codes.  Under some of the codes, remuneration requirements apply to ‘material risk takers’ (MRTs), who are individuals whose professional activities have a material impact on the risk profile of the firm or the assets that the firm manages. 

When determining the amount of variable remuneration paid to an MRT, certain firms must take into account financial and non-financial criteria.  Firms are not required to include ESG factors in the non-financial criteria they choose to assess the performance of MRTs.  However, in our experience, financial services firms are considering and reviewing whether incentives for directors, top management and MRTs are aligned with ESG factors.

Directors could be held liable for failing to get the company to comply (in the sense of failing to comply with the broader directors’ duties), whereas top management employees who are not directors cannot be held liable.

There are no regulations in the UK governing ESG obligations for employees' remuneration who are not directors and top management.

Pay ratio reporting

Listed companies (and certain other companies) with more than 250 UK employees are required to report annually on the difference the pay of their chief executive officer (CEO) and that of the company's UK employees whose remuneration is at the 25th, 50th and 75th percentiles. The information must be set out in a table and must be accompanied by a narrative explaining the methodology used to calculate the pay ratios, any changes in the ratio from the previous financial year, and any trends in the median ratio. The main objective of the pay ratio reporting regime is to ensure that companies explain why the pay ratio is appropriate and to help enable shareholders and other stakeholders consider how executive pay relates to pay and reward throughout the company.

Gender pay gap reporting

It is mandatory for employers with 250 or more employees in England, Scotland, and Wales to publish their gender pay gap figures. The gender pay gap is the difference between the average (mean or median) earnings of men and women across a workforce. Gender pay gap calculations are based on employer payroll data drawn from a specific date each year. This specific date is called the “snapshot date.”

N/A – In the UK, there are no prescribed remuneration schemes in relation to ESG.

No, the KPIs vary significantly from company to company, but see other answers in this questionnaire.

Not consistently across all sectors, but see other answers to this questionnaire.

Yes – in market practice, more and more companies seem to strongly believe that remuneration policies should be clearly linked to incentivising behaviours that are consistent with the company’s purpose and values. This should include performance on environmental and social issues and should demonstrate some recognition of wider societal expectations, the general economic environment, and the returns to long-term shareholders.

Energy – typically focused on occupational health and safety;

Finance – typically focused on green energy financing;

Construction industry – sometimes focused on diversity.

Unlike traditional financial performance metrics (which are typically numerical and easy to measure), ESG KPIs generally require both quantitative and qualitative data to help Boards and Remuneration Committees assess the Company’s actions and intentions.

Environment

• Progress towards green financing commitments
• Reducing carbon emissions
• Increasing use of renewable energy
• Achieving net zero targets
• Food waste reduction

Social

• Investing in communities
• Increasing leadership diversity
• Community engagement and support
• Occupational health and safety
• Accessibility
• Education and training
• Data protection

Governance

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

Cross-Sectoral

• Sustainable production and supply chains, and responsible sourcing

Both

Typical weighting of 15%.

LR 9.8.6R(8) of the UK Listing Rules - a company with a UK premium listing is required to include a statement in its annual report on the extent to which the disclosures therein, including remuneration disclosures, are consistent with the recommendations of the Taskforce on Climate-Related Financial Disclosures.

The Sustainable Finance Disclosure Regulation (SFDR) requires some financial institutions to ensure that their remuneration policies promote effective management with respect to sustainability risks.

N/A

No

The FCA’s current strategy includes developing a policy approach to ESG governance, remuneration, incentives and training/certification in regulated firms.