Envisioning a Duty of Directors to Link Executive Compensation to Climate Change: Lessons from Europe

The practice of tying executive compensation to climate change goals has gained some traction. However, designing a duty of directors to link executive pay to climate change objectives poses significant challenges. Some lessons can be drawn from countries attempting to establish such a duty. This Article examines Europe’s Corporate Sustainability Due Diligence Directive (CSDDD) and its negotiation process and draws insights for effectively crafting such a duty. The CSDDD, which entered into force on July 25, 2024, mandates large companies operating in Europe to conduct due diligence on human rights and environmental impacts with respect to their own operations and those of their business partners and subsidiaries globally. Although the proposed article 15 requiring the integration of sustainability and climate change objectives into executive remuneration was ultimately removed after intense negotiations, it serves as a valuable starting point for discussion. By scrutinizing article 15 and proposed amendments, this Article identifies several critical issues concerning the enforceability, materiality, measurability, transparency, and environmental justice implications of directors’ potential duty to tie executive pay to climate change. To address these issues, this Article suggests a research agenda for exploring the feasibility of incorporating specific metrics or targets. It also discusses the merits of making such metrics incrementally binding, material, measurable, transparent, sensitive to multiple stakeholders’ interests, and responsive to issues of environmental justice while preserving business flexibility and cost effectiveness. By envisioning this duty with these considerations, this Article sheds light on its potential for incentivizing effective corporate action on climate change amid ambiguous corporate environmental commitments.