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1、WjORlOECONOMICFQRUMHowtoSetUpEffectiveClimateGovernanceonCorporateBoardsGuidingprinciplesandquestionsExecutiveCompensationGuidebookforClimateTransitionIncollaborationwithWorldEconomicForum,sPrinciplesforEffectiveClimateGovernanceWiH2021WilteTOWef8Watson.A11QhtsreservedClimatelSupportingchaptersChapt
2、erZero Brussels , DrdorsOrnate ForwnChapterZero Canada Tb Dirwctoa Cimt FoornAustralianInstituteofCompanyDirectorsChapterZeroBrazilhIBGCClwnateForumChapterZero ChileThpDirKionrClmatFFanjmChapterZeroFrance1.eRxumCtorwtCJeSAdrWiiSIraleUrSClimateGovernanceInitiativeGermanyClimate Guviknknle malariaChap
3、terZero Poland Tw DmlcnCimetsRvunriChapterZeroMdxicoIntcistivadaGoberwvaCimMca* CLIMATE GOVERNANCE INITIATIVE RUSSIANACDChapterZeroSwitzerlandTheDirectors,CfinateForumChapterZeroTnDiwctorsCHrrMFortIndustry deep-divesWBusiness,investorandIBestpracticesindrivingclimateMarketinsights:Climatemetricsinre
4、gulatorycontextobjectiveswithexecutivempensationexecutiveincentiveplans02021WillisTowersWatson.Allrightsreserved-ProprietaryandConfidential.ForWilfcSTowersWatscnandWiifcsTowersWatsonc*entuseonly.AboutthisguidebookAsorganizationsacknowledgetheneedtotransitiontoanetzerobusinessmodel,investorsexpectboa
5、rdmembersnotonlytodrivetheadoptionofacredibleclimatetransitionstrategy,butalsotoprovideclearevidencethatitsexecutionhasbeenembeddedeffectivelyacrossallkeymanagementprocesses,includingenterpriseriskmanagement,strategicplanning,innovation,capitalinvestmentandhumancapital.Onecriticalleverisformanagemen
6、ttobeheldaccountableforthedeliveryofthestrategyand,whereappropriate,thecapturingofopportunitiesinclimatetransition.WillisTowersWatson,partneringwiththeClimateGovernanceInitiative,hasdevelopedthisguidebooktoexplorehowtodrivetheclimatestrategybymeaningfullyembeddingitwithinexecutivecompensationframewo
7、rks.Ourworkisinformedbyfindingsofsurveysandinterviewswithinvestorsandboardmembersfromorganizationsacrosstheglobe.Epensation12Marketinsights:Climatemetricsinexecutiveincentiveplans23Industrydeep-divesEndnotesTableofcontentsBusiness,investorandregulatorycontextBestpracticesindrivingclimateobjectiveswi
8、thexecutiveThisguidebookissetupasaninteractivePDF.Eachofthesectionsmaybeaccessedbyclickingonthelinksbelow.Forexample,tojumptoourviewson“effectiveexecutivecompensationdesign；simplyclickonthebanneratthebottomofthepage.DeepdivesonselectindustriescanbeaccessedattheendofuMarketinsightssection.Simplyclick
9、ontheindustryonpage29,andthiswilltakeyoutoindustry-specificobservationsonhowtheindustryrelatestoclimatechangeatahighlevel,wherecompanieswithintheindustryareiritermsofincorporatingclimateintotheirexecutiveincentiveframeworks,commonchallenges,aswellasleading-companyexamples.Business,investorandregulat
10、orycontextBestpracticesindrivingclimateobjectiveswithexecutivecompensationMarketinsights:ClimatemetricsinexecutiveincentiveplansIndustrydeep-diveswiN心2OWillisTowersWats.Allnghtsreserved.ProprietaryandConfidential.ForWilbsToWerSWatsonandWilteTowersWatsonCfcentuseonly.TheWorldEconomicForumPrinciplesfo
11、rEffectiveClimateGovernanceIn2019,theWorldEconomicForumunveiledthePrinciplesforEffectiveClimateGovernanceforo-executiveboarddirectors.Theseprinciplessetouthowwell-governedboardsshouldincorporateaclimatelensintoallrelevantaspectsoftheiroversightfunctions.Oftheeightprinciples,Principle6focusesonincent
12、ivization.1Withinthisarea,executivecompensationisidentifiedasoneofthekeymechanismsthatdrivetherightbehaviorsandenablethecompanytodeliveronitsclimatetransitionstrategy.CLIMATEACUNTABILYSUeJECTCOMMANDSTRATEGICINTEGRATION*ooIC0MMC*QUMBOARDSTRUCTUREMaterimityASSESSMENTHowtoSetUpEffectiveClimateGovernanc
13、eonCorporateBoardsGuidingprinciplesandquestionsPrinciple6-IncentivizationTheboardshouldensurethatexecutiveincentivesarealignedtopromotethelong-termprosperityofthecompany.TheboardmaywanttoconsiderincludingClimate-relatedtargetsandindicatorsintheirexecutiveincentiveschemes,whereappropriate.Inmarketswh
14、ereitiscommonplacetoextendvariableincentivestonon-executivedirectors,asimilarapproachcanbeconsidered.Business,investorandregulatorycontextBestpracticesindrivingclimateobjectiveswithexecutivempensationMarketinsights:ClimatemetricsinexecutiveincentiveplansIndustrydeep-diveswiH2021WilllsTowersWatson.AJ
15、Ightsreserved.ProprietaryandConfidential.ForWdksTowersWatsonandVlksTowersWatsonckentuseonly.Don,tsManage annual reports, executive compensation disclosures and ESG/climate reporting in silosUse judgment-based or ambiguous climate metrics or goalsBlindly follow market practices and what uIeading comp
16、anies doSet annual goals with no tie-in to the overall net zero visionMarket insights: Climate metrics in executive incentive plansIndustry deep-divesContinuously monitor and evolve measurement of climate goals Consider company-specific climate transition strategy and metrics Measure short-, medium-
17、 and longterm progress towards net zero Select metrics and goals that are science-based, clear, ambitious, transparent and consistent Tell the story of how executive compensation drives climate transition with robust disclosuresAdd climate metrics to incentive plans as a ucheck-the-box exerciseBusin
18、ess, investor and regulatory contextExecutivesummaryThroughinterviewswithboardmembersaroundtheworld,reviewofpublicdisclosuresfrommorethan800companiesandWillisTowersWatson,sexpertiseinexecutivecompensationdesign,wedocumentourobservationsonthebestpracticesin_howexecutivecompensationcanbeapowerfultooli
19、ndrivingclimatetransitionandclimateriskmitigation.Themeritsoflinkingexecutivecompensationandclimateobjectivesarewellestablished.Emissionsreductionandrenewableenergyadoptionareincreasinglyprevalentmetricsinexecutiveincentiveplans,especiallyinEuropeandinhigh-emittingindustriessuchasoilandgas.Thererema
20、insmuchforthebusinesscommunitytolearnabouttheimplicationsofatransitiontonetzero.Settingconsistentandreliablegoalsandmilestoneswillbechallenging.Butcompaniesmustresistthetendencytowardinaction,asclimateiswidelyconsideredthesingle-mostsignificantrisktotheplanet,businessesandthestabilityoftheglobalfina
21、ncialsystem.BestpracticesindrivingclimateobjectiveswithexecutivecompensationwinistowerswaU2021WillisTowersWatson.Allghtsreserved.ProprietaryandConfidential.ForWilksTowerSWatsonandWilfeTowersWatsonc*etuseody.Industrydeep-divesMarketinsights:ClimatemetricsinexecutiveincentiveplansBusiness,investorandr
22、egulatorycontextwillist2021WilllsTowersWatson.AllQhtsreserved-PropfieiafyandConfidential.ForWUksTowersWatsonandWilksTowersWatsoncentuseody.The stark reality and business imperative to actBusiness, investor and regulatory contextBest practices in driving climate objectives with executive compensation
23、winistowerswaUO 2021 Willis TOWerS Watson. All rights reserved. Proprietary and Confidential. For Wills Towers Watson and Willis Towers Watson dient use only.Industry deep-divesDrawingonthefindingsofmorethan14,000scientificstudies,theSixthAssessmentreport2fromtheIntergovernmentalPanelonClimateChange
24、(IPCC)warnedthatunlesstheworldseesadrasticreductioningreenhousegas(GHG)emissionswellbeyondthetargetsalreadyadoptedworldwide,averageglobaltemperatureareexpectedtosurpassthe1.50Cthresholdwithinthenext20years,causingextremeandirreversibledamagetopeopleandtheplanet.TheIPCCreporthassharplyraisedthepressu
25、reonnationstomakefarmoreambitiouscommitmentsonclimatetransitioninadvanceoftheUNClimateChangemeetingheldinNovember2021,COP26.Assignatories(nowover190)oftheParisAgreementlayoutplanstoachievenetzeroby2050orearlier,attentionhasalsoturnedtotheprivatesector.AsofMarch2021,morethanone-fifthoftheworld,slarge
26、stcompanieshadcommittedtoanet-zerotarget3-afigurethatisexpectedtorise.1.eftunchecked,climatechangeposesthesingle-greatestrisktoglobalsystemicfinancialstability.Climateriskaffectsdifferentcompaniesindifferentways:Heavyemitters(businessesthateitherproduceorconsumelargeamountoffossilfuels)facethechalle
27、ngeofcompletelyreshapingtheirbusinessmodels;andcompanieswithphysicalassetsinareaspronetoextremeweathereventsmustidentifystrategiestomitigateriskandincreaseresilience.Buttherearealsoaspectsofclimateriskthataresystemicandfromwhichnocompanyisimmune.Inparticular,therearedifferentlevelsofriskassociatedwi
28、thdifferenttypesoftransitionfromtherelativelysmoothtotheverydisorderlytransitionwhichwillresultfrominadequateactioninthenearterm.Climatetransitionandtheneweconomy,however,alsopresentopportunitiesformanybusinessestoinnovateandofferzero-carbonalternativestoconventionalhigh-carbonproducts,thuspotential
29、lydisplacingincumbentswithdisruptivebusinessmodels.Consumersareincreasinglydecidingwheretheybuy,andemployeesaredecidingwheretheyworkbasedoncompanies*commitmentstoclimatetransition.Forward-thinkingbusinessesseethesepressurepointsasopportunitiestogainacompetitiveedge.Marketinsights:Climatemetricsinexe
30、cutiveincentiveplansRegulatoryactionsandnetzeroplansbygeographyWhileactionsvarybyregion,thedirectionoftravelisclearNorth AmericaIn June 2021, Canada enacted the Canadian Net-Zero Emissions Accountability Act, which lays out a clear path to net zero by 2050.4 The U.S. president released an executive
31、order to set an interim carbon reduction goal by 2030.5 Some states have enacted net zero plans by 2050. The House and Senate each passed major legislation on clean energy innovation between 2020 and 2021, pending reconciliation.Latin America and the CaribbeanAll countries have rectified the Paris A
32、greement, and most have submitted their Nationally Determined Contributions (NDC), their post-2020 climate action plans. Some countries in the region, such as Chile, were among the first countries to submit NDCs.6T ；WesternEuropeandtheUnitedKingdomTheEUhascommittedtonetzeroby2050,withsomememberstate
33、ssettingearliertargets.TheEuropeanParliamentreachedaprovisionalagreementontheClimateLawRegulationinApril20217Inthesamemonth,theU.K.setanambitiouscarbonreductiongoal8andcontinuestobeagloballeaderinclimatetransition.MiddleEastandAfricaProgressvaries.Whileanumberofcountriesintheregionhavenotratifiedthe
34、ParisAgreement,some(e.g.,Nigeria,MoroccoandSouthAfrica)havetakenboldactionstowardnetzerothroughacarbontaxandsignificantrenewableenergyinvestments,9andSaudiArabiahaspledgedtoreachnetzeroby2060.10IAsiaPacificProgressvariesgiventhemixofdevelopedanddevelopingeconomies.Mostcountrieshavesubmittedplanstowa
35、rdnetzeroby2050(China,SingaporeandAustraliainthesecondhalfofthecentury).Somecountrieshavealsoinstitutedacarbontaxandinvestedinrenewableenergy.Industry deep-divesBusiness,investorandIBestpracticesindrivingclimateIMarketinsights:Climatemetricsinregulatorycontextobjectiveswithexecutivempensationexecuti
36、veincentiveplansWiN2021WillisTowersWatson.Allnghtsreserved.ProprietaryandConfidential.ForWilteTowersWatsoaandWilksTowersWatsonCfcentuseonly.TCFD5SrecommendationsencouragecompaniestodisclosehowmetricsandtargetsaretiedtoremunerationTheTaskForceonClimate-relatedFinancialDisclosures(TCFD)setoutafoundati
37、onalframeworkforcorporatedisclosureconsistingofgovernance,strategy,riskmanagement,andtargetsandmetrics.Inparticular,TCFDcallsonorganizationstodisclosethemetricstheyusetoassessclimate-relatedrisksandopportunities,aswellastheirperformanceagainstsuchmetrics.Recommendeddisclosuresalsoincludescope1(direc
38、t),2(purchasedenergy)and3(suppliersandcustomers)GHGemissions,aswellashowclimateriskisembeddedintheorganizationsenterpriseriskmanagementprocess.TCFD,s core elements of recommended climate-related financial disclosuresGovernanceStrategyRisk managementMetrics and targetsDisclose the organizations gover
39、nance around climate- related risks and opportunitiesDisclose the actual and potential impacts of climate- related risks and opportunities on the organizations businesses, strategy, and financial planning where such information is materialDisclose how the organization identifies, assesses, and manag
40、es climate-related risksDisclose the metrics and targets used to assess and manage relevant climate- related risks and opportunities where such information is materialWell-measuredanddisclosedclimatemetricsandtargetsarecriticaltodrivingclimatetransitionwithincentivizationandremuneration.Broaderadopt
41、ionofTCFD,srecommendationswillsupportthiscause.Business, investor and regulatory contextIndustry deep-divesBestpracticesindrivingclimateobjectiveswithexecutivempensationMarketinsights:ClimatemetricsinexecutiveincentiveplansWiNistower$wat$2021WillisTowersWatson.AJIrightsreserved.ProprieiaryandConfide
42、ntial.ForWilksTOWerSWatsonandWilksTovsWatsonCtentuseonly.InvestorsjperspectivesTheinvestorcommunityseesclimatetransitionasaninvestmentriskandanopportunity.Institutionalinvestorswanttoensurethatthecompaniestheyinvestinhaveviablebusinessmodelsinalow-carboneconomy,sothattheirlong-terminvestmentscreates
43、ustainablevalueandgreaterrisk-adjustedinvestmentreturns.InstitutionalinvestorsarealsoattractedbytheapparentuSustainabiIitypremiumnonESGassets.GlobalESGassetsexceed$40trillionin2020andareexpectedtoriseabove$50trillionin2021.11SomeinvestorsbelievethatbecauseESGandclimatecommitmentsultimatelydrivelong-
44、termvaluecreation,conventionalfinancialandtotalshareholderreturnmeasuresmightbesufficienttodrivethedesiredattentionfrommanagement.Theybelievethattheremightnotbeaneedforanalignmenttoincentives.However,mostinstitutionalinvestorsconsiderincentivecompensationtobeapowerfultoolinacceleratinganorganization
45、sclimatetransition.Byelevatingtheimportanceofthetopicintheboardroomandbyholdingexecutivesaccountableforthecompany,slong-termclimatetransitiontargets,investorsarepushingtoseedisclosureofmeaningfulclimate-relatedtargetsandhowtheyareincorporatedintoincentiveplans.Business,investorandIBestpracticesindri
46、vingclimateIMarketinsights:ClimatemetricsinregulatorycontextobjectiveswithexecutivempensationexecutiveincentiveplanswiNi$tower$wat$2021WillisTowersWatson.AJIrightsreserved.ProprieiaryandConfidential.ForWilksTOWerSWatsonandWilksTowersWatsoncetuseonly.WestronglyquestionthenotionthatcClimatestrategyisbakedintoourremunerationplan,ifwedonotseedisclosureofmeaningfultargets/1Ifdisclosuresarenotforthcoming,oriftargetsarenotmeaningfulenough,theninvestorswillbeonit,andmayvoteagainstExecutivePayresolutions,orevenreelectionofRemunerationCommitteemembers.nitIndustry deep-divesIfyouhavea2030or
