The Advisors' Blog

The Compensation Monitoring Contact Group (CMCG) of the FSB is tasked with monitoring the progress of financial institutions’ implementation of FSB’s Principles for Sound Compensation Practices and Implementation Standards. In its last report in November 2021, the CMCG observed an emerging trend that financial institutions are increasingly using non-financial measures in compensation programs and decided to examine this further in 2022, focusing on climate-related factors. The report on that study was released in April.

The study showed that there was a wide variety of quantitative and qualitative metrics used by financial institutions that addressed climate change in their compensation programs, including reductions in their own carbon footprint, growth of sustainable finance, improved climate-related leadership, training, innovation or disclosure, integration of ESG considerations into the decision-making process and external-based metrics such as ESG ratings and indices. On the last metric, there was a difference in opinion among participants as to whether it was advisable to use external ESG ratings:

Some participants noted that their firm uses external ESG ratings. Others that do not use them expressed caution that as financial institutions are at different stages of their journey and not targeting the same objectives, a financial institution’s relative position against peers does not always give a precise reflection of progress given different starting points. Instead, they felt that the core strategy is something which executives should be held accountable for and actual target relevant to the core strategy should be achieved instead of relative positions.

While metrics varied widely, the following challenges to incorporating climate change in compensation programs were nearly universally reported by participants:

– Data availability, reliability and analysis
– Difficulty in developing objectively measurable KPIs acceptable to all stakeholders
– The misalignment of long-term climate outcomes and annual compensation plans
– How to cascade climate targets beyond certain executives
– Regulatory and policy uncertainties

The survey concluded that financial institutions’ use of climate metrics in compensation is still at an early stage and, where used, the impact on total compensation remains modest.

– Meredith Ervine