How can we motivate CEOs of companies to do more for the planet? Our latest multi-stakeholder briefing, “Putting Sustainability on the Payroll”, — supported by a wide range of companies, investors, executives, and non-profits — reveals the importance of considering how directors' remuneration can influence their decision-making and guide responsible corporate behaviour.
A large number of companies in the EU include sustainability criteria in executive pay, knowing this helps them manage sustainability risks, adapt to market changes and mitigate their negative impacts on people and the environment. However, policy-level intervention is needed to ensure such practices are applied by more companies on a systemic basis, to create a level-playing field and ensure the remuneration policies are effective.
The upcoming EU Corporate Sustainability Due Diligence Directive (CSDDD) offers a unique opportunity for all larger EU companies to align a meaningful portion of directors' bonuses with the pursuit of companies’ sustainability objectives. Recognising its importance, this policy is supported by many responsible business and investor groups.
In the briefing, we highlight four key recommendations for an impactful and effective Corporate Sustainability Due Diligence Directive:
To effectively motivate company directors to prioritise sustainability, it is important to link a meaningful proportion of their variable remuneration to the company's sustainability targets. This connection should be made explicit as an integral part of the Directive and should be tied to the directors' responsibility for conducting the company's due diligence obligations and implementing environmental transition plans.
The Directive should specify that the variable remuneration obligation applies to all companies in scope by removing references to existing practices (e.g., obligation applying only to companies who are already linking sustainability targets to directors' pay) and any additional threshold.
The Directive must spell out that a meaningful proportion of variable remuneration should be linked to climate and other materially relevant sustainability targets. Such an approach should make directors’ variable pay reflect the need to put companies’ financial and sustainability objectives on a more equal footing, integrate sustainability issues in remuneration policies in a meaningful manner, and limit greenwashing possibilities.
Sustainability criteria used for remuneration policies should encompass the full range of sustainability matters. The current proposals are limited to climate objectives, whereas a coherent and effective approach requires greater articulation with general and specific obligations as spelt out in Articles 25 and 26. Sustainability-related remuneration policies should be based on a broader set of detailed and measurable criteria, which would provide more legal clarity to companies when pursuing sustainability targets.