Thematic Review on Sustainability-Related Information in Remuneration Policies

On 23 November 2022, the Danish Financial Supervisory Authority (“DFSA”) published a thematic review on sustainability-related information in remuneration policies. The DFSA reviewed information given by six selected pension funds and life insurance companies.

According to SFDR article 5, financial market participants (“FMPs”) must include in their remuneration policies information on how the policies are consistent with the integration of “sustainability risks”, and this information shall be published on the website of the FMP. A “sustainability risk” covers an “environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment”, cf. SFDR article 2(22). Therefore, it is a financial risk which a company and its investors as well as customers are exposed to. Sustainability risks differs from “sustainability impact” which covers situations where companies have an impact on environmental, social and governance issues (ESG).

Article 5 does not require FMPs to establish a connection between the FMP’s remuneration policy and its integration of sustainability risks. However, FMPs are required to disclose whether there is a connection, and if there is, to describe it.

The investigation showed that the majority of the surveyed companies had not provided adequate information. The DFSA found that the investigated FMPs often disclose whether the above-mentioned connection exist, but that information on how the connection is ensured is missing. Vague statements such as stating that the FMP considers sustainability risks in its remuneration policy is not adequate. Further, the DFSA found that several of the FMPs in their disclosures do not adequately distinguish between 1) how the remuneration policy seeks to contribute to the FMP’s sustainability objectives and 2) how it seeks to enhance the management of sustainability risks in the FMP’s investment process. Also, the DFSA underlined that in case of a connection between remuneration and integration of sustainability risks, it must clearly be described in the remuneration policy how the remuneration structure is contributing to ensuring non-excessive risk-taking regarding sustainability risks. Four of the investigated companies were on this basis given injunctions for insufficient information.

Based on the investigation, the DFSA has given the below recommendations, after which FMPs shall ensure:

• that the remuneration policy contains information on how the remuneration is in accordance with integration of sustainability risks, where sustainability risks are to be understood as financial risks, and that this information is published on the FMP’s website;
• that the remuneration policy describes, not only whether, but also how the remuneration policy is consistent with the FMP’s integration of sustainability risks. This entails that FMPs, which state that the remuneration policy is in accordance with the integration of sustainability risks, have to elaborate on how sustainability risks is considered as an element in variable remuneration schemes, etc.;
• that the FMPs comply with the information provided in their policy and that this can be proved.
• that the FMPs publish the relevant information required on a subsection to the FMP’s main website. It is not enough, that the information can be found only by using the search field.
• Consistency between the information provided on the website and the information provided in the remuneration policy.

The full report can be read here.

Tags:  Sustainability