Governance of the climate transition in companies
Six months after publishing its first report on financing the ecological transition in France, and to mark the first anniversary of its creation, the Institut de la Finance Durable (IFD) has published its second report, Gouvernance de la transition climat dans les entreprises : 10 recommandations de la Place de Paris. This new report is part of the IFD’s work on climate governance, set out in the Perrier Report of March 2022, which aims to define the ways in which ‘climate action’ can be integrated into companies, at both board and executive levels. It is the fruit of work chaired by Angeles Garcia-Poveda, Chairman of Legrand. Some thirty interviews were conducted, with a balanced mix of rating agencies, proxies, market authorities, non-financial companies and investors.
The report takes stock of governance practices in terms of climate, and then puts forward ten proposals, notably relating to the organization of Boards of Directors, dialogue with shareholders and remuneration policies.
With regard to the organization of boards of directors, 94% of CAC 40 companies and 86% of SBF 120 companies now have a dedicated CSR committee to better integrate corporate social responsibility (CSR) issues within the boardroom. As an extension of these advances, IFD considers that the priority from now on is to ensure sufficient and coordinated preparatory work on climate risk and transition plans by the committee(s) concerned, whose respective roles should be clarified, to enable these subjects to be properly taken into account by the entire Board (proposal 1).
Furthermore, while it has been established that directors are better informed about CSR-related issues, there is still room for progress in training all Board members. In particular, the IFD calls for an organized program to enhance the general skills of all directors , and to ensure that training modules are offered to directors at least once every three years (proposal 4). The Institute also supports the development of a global, more homogeneous and standardized climate training program, accessible to as many companies as possible, as well as the labeling of such training programs to reinforce their credibility(proposal 6).
As for dialogue with shareholders, the IFD has noted that the stakeholders interviewed, particularly investors, expect greater transparency on the objectives and actions implemented by the company to reduce its carbon emissions. IFD supports the idea of reinforcing information mechanisms and intensifying shareholder dialogue on the company’s transition plans and carbon strategy in the following ways:
- Systematize the presentation of climate strategy and/or its implementation by companies at the Annual General Meeting of Shareholders (proposal 7) ;
- Pursue convergence in the treatment of financial and climate information (proposal 8).
Finally, with regard to remuneration, companies are gradually incorporating climate-related criteria into executive compensation. 87% of SBF 120 companies and 98% of CAC 40 companies have integrated one or more climate-related criteria into short- or long-term variable compensation (compared with 81% of SBF 120 companies and 91% of CAC 40 companies in 2021). France seems to be well advanced. In addition, the weighting of extra-financial indicators varies between 10% and 50% of the annual variable remuneration awarded to CAC 40 executives. To maintain this momentum, the IFD recommends that climate criteria, combined with other key criteria relating to biodiversity, governance and social commitment, assessed globally for variable compensation (annual and long-term), should represent a significant proportion of the extra-financial determinants of variable compensation.