The number of ESG criteria linked to managers’ remuneration is falling

A complex picture of light and shade, dominated by the transition to the new European reporting framework and by a number of counter-trends. The sixth Report on Corporate Governance, edited by Massimo Belcredi and Stefano Bozzi for the Fin-Gov Research Centre at the Catholic University of the Sacred Heart, provides a detailed overview of corporate governance issues.

The main issues emerging from the debate concern the first reduction in the proportion of senior executives’ variable remuneration linked to ESG parameters, the lack of transparency regarding the weightings of individual sustainability targets, the persistence of the gender pay gap both amongst employees and at management level, and the methodological complexities associated with calculating Scope 3 emissions and workplace safety.

Returning to the first theme mentioned in the introductory overview – namely, the link between managers’ incentives and ESG metrics – as Bozzi explicitly notes in his slides, ‘the proportion of remuneration linked to ESG targets has, for the first time, fallen slightly’. An examination of the level of detail provided by companies under the new European regulation reveals that, although 87 per cent of companies with ESG targets in their MBO (management by objectives) plans disclose the broad categories and their overall weightings, only 41 per cent disclose the weightings of individual targets. In this regard, Bozzi highlights that ‘disclosure regarding individual targets and their respective weightings leaves much room for improvement’. Among the selected metrics, the priority given to climate change is notable: the reduction of greenhouse gas emissions is the most common metric in both short-term MBO plans (40 per cent of cases) and long-term LTI plans (48 per cent of cases, alongside 29 per cent for Diversity & Inclusion).

Returning to the issue of the gender pay gap and its social impact, the data paint a picture in which greater overall transparency regarding the workforce (where women account for 36 per cent of the total, but only 21 per cent of managers) contrasts with structural pay gaps. Summarising the empirical data on pay, Bozzi emphasises that ‘women’s pay = 84 per cent of men’s, for both employees and managers’. Whilst almost all companies report the pay gap at a general level, transparency regarding managerial positions remains limited (available or reconstructible in only 35 per cent of cases) due to the voluntary nature of the reporting required by the legislation on senior management. Still on the social front, the data on workplace safety required by the new RDS standards show an average of 6.25 accidents per million hours worked (down from 6.8 the previous year), with very significant sectoral variations ranging from 1.02 in the energy sector to 14.8 in the retail sector.

Fin-Gov describes the impact of the adoption of the CRSD Directive, which has made Sustainability Reports (SRs) more concise and readable than the former DNFs. Disclosure on energy consumption covers almost all issuers (98 per cent), with the share of energy from renewable sources rising to an average of 35 per cent (peaking at 45 per cent in large companies and 51 per cent in the financial sector). With regard to CO₂ emissions, almost all companies (90%) disaggregate their data in accordance with the GHG Protocol, showing a fall in total emissions from 11.9 to 9 million tonnes, with indirect emissions along the value chain (Scope 3) accounting for 87 per cent of the total. However, when assessing the actual scale of this reduction, Bozzi introduces a strong element of caution in his slides, warning that ‘the interpretation of emissions data requires caution’. Bozzi explains that the decline is often linked to changes in reporting methods, highlighting ‘cases of exponential increases in emissions, probably due to discontinuities in the calculation of Scope 3 emissions’ and the persistence of ‘risks of double counting in the calculation of Scope 3 emissions’.