Carney Panel Urges CEO Compensation Link With Climate Risk

Energy companies should consider telling investors how executive compensation is linked to climate change risks, according to a panel advising the Group of 20 nations.

Remuneration policies should consider how tighter pollution laws, extreme weather events and efforts to reign in fossil fuels could impact creditors and shareholders, according to the Task Force on Climate-Related Financial Disclosures, the group set up by Bank of England Governor Mark Carney in his role as head of the Financial Stability Board.

“There are some companies that are profoundly affected by climate risk,” Carney said in a Bloomberg Television interview in London on Wednesday. Investors want “companies that are well managed; companies that think about creating value over the medium-term.”

The link between environmental risk and executive pay was thrust into the spotlight last year by Volkswagen AG’s “dieselgate” scandal. Its chairman Hans Dieter Poetsch and other top executives agreed to significant bonus cuts after labor unions and the German state of Lower Saxony, the company’s second-largest shareholder, opposed generous payouts following the financial backlash from the scandal.

In December 2015, Carney named Michael Bloomberg, founder and majority owner of Bloomberg News and its parent company Bloomberg LP, to lead the 31-member panel, which also includes executives and advisers from a variety of industries around the world.

Energy companies, which are responsible for about 60 percent of global emissions, are particularly vulnerable to concerted global effort to tackle climate change, according to the report, which noted the rapidly falling costs of clean-energy alternatives. Organizations should consider describing in detail how manager and board member pay is tied to climate risks, the task force advised in its 110-page report annex.

Almost 30 energy companies and utilities, including Enel SpA, Fortum Oyj, and Essar Oil Ltd. already offer their chief executives monetary rewards for the management of climate change, according to the CDP, formerly called the Carbon Disclosure Project, which surveys companies on their response to global warming. Another 17 energy companies and utilities, including SSE Plc and E.ON SE, reported monetary incentives for their board members, according to this year’s survey. Almost 5,500 companies either didn’t respond to the survey, or didn’t answer the question.

“How companies are remunerating their boards has been a very understated feature of the debate until now,” said Mark Lewis, a managing director at Barclays Plc and member of the task force, in a phone interview. “Carney was driven by the perception that this is a topic that’s come of age. Investor pressure is already there.”

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The advice, which may be adopted into law by some G20 countries, recommends companies use scenarios to investigate how they would be affected by targets to cut greenhouse gases. That’s a key issue for fossil-fuel producers from Peabody Energy Corp. to Exxon Mobil Corp., which have clashed with New York Attorney General Eric Schneiderman over accusations they didn’t adequately inform investors about the climate risks they face.

The report will help financial markets “manage risks, and seize opportunities from climate change,” Carney said in a statement accompanying the report, which describes climate change as one of the most significant and misunderstood risks that companies face.

In the interview, he said a lack of information on potential climate-related risks could affect companies’ valuations or their ability to access credit.

“This is a solution by the market, for the market,” Carney said.

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