As addressing the financial risks associated with climate change become a higher priority, financial firms are building climate-related considerations into their executives’ pay packages, according to a new report from the Financial Stability Board (FSB).
The global policy group issued a report that examined how financial institutions are incorporating climate objectives into their frameworks for determining executive compensation.
For instance, industry firms are using climate-related metrics such as carbon footprint reductions, the provision of sustainable finance products, and accountability measures, such as leadership on climate-related issues, as factors in setting compensation. Some firms are also using external benchmarks, the report noted.
Climate-related metrics are generally being applied to setting compensation for top executives, primarily in their short-term incentive plans, the FSB said.
“The impact of climate-related metrics on total compensation outcomes is relatively modest at present, partly because their weights are still small or they are used only as an overall adjuster or modifier,” the report noted.
The group also identified an array of challenges to using climate metrics in executive compensation plans, including a lack of reliable data for evaluating executive performance on climate goals, the need for objective metrics that align with firms’ strategies, and the mismatch between long-term climate goals and the short-term nature of executive pay.
“Incorporation of climate-related metrics into compensation frameworks is expected to evolve further,” the FSB said, adding that financial institutions need to continue developing metrics to align compensation with prudent risk taking.
“Financial regulators can facilitate this process by helping share regulatory and industry practices with each other and with industry,” it said.
Additionally, firms need to find ways to deliver climate-based incentives beyond the executive level to more junior employees, it said.