European Banks Begin to Link Workers’ Wages to Climate Change and Sustainability Goals

Banks in Europe will soon have to prove that they are contributing to a cleaner environment, a better society and sound management, or else they will face a cut in their wages and financial benefits.

In the latest indication that ESG rules will restructure the finance sector, the majority of European banks surveyed by Bloomberg said they already have – or are developing – a model linking employee bonuses and compensation to company performance on sustainability indicators.

The move comes as Europe‘s regulators explicitly add ‘environmental, social and governance’ risks to wage-setting standards, and these changes will come into effect by the end of 2021.

This development opens up another path through which European policymakers are seeking to redefine capitalism. The ultimate goal, ideally, is to reward sound behavior with financial incentives to encourage it.

But the measurement of sustainability is far from clear and direct, which is recognized by the finance sector itself, and this means that the salaries and wages of bankers will depend in the future on a variable that is more difficult to evaluate and calculate than the variable of profitability, which facilitates the process of manipulation.

Despite the absence of any detailed common standards, some of the world’s largest banks say they are already implementing “environment, society and governance” sustainability goals in their pay and compensation policies.

At HSBC Holdings Plc, executive board members must reduce the bank’s carbon emissions and help its clients achieve the same goal. If they fail to do so, a criterion representing 25% of their assessment will be negatively affected, upon which the value of their variable wages will be determined through the end of 2023. Last year, when environmental issues were less important than it is now, the bank’s CEO Noel Quinn, as well as the Chief Financial Officer, scored Eon Stevenson gave an 85% rating on this particular criterion.

UniCredit SpA says that 10% of the pay standards received by top and middle management are based on the rating the bank receives in ESG sustainability standards, as well as on customer and employee satisfaction with performance. This year, the Italian bank extended its sustainability criteria to include those who make material risk decisions, such as those in the underwriting and promotion sector. The ability of UniCredit Bank to reduce its harmful impact on the environment and provide products and services that comply with the sustainability standards of “Environment, Society and Governance” will contribute to increasing the amount of incentives and benefits.