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The (i) Climate Change and Energy Transition Act; and (ii) the Act amending the Corporate Enterprises Act and other financial provisions include significant modifications for corporate enterprises in general, and listed companies in particular, regarding environmental, social and good governance (ESG) aspects.

The Spanish legislature has adopted various provisions including measures applicable to corporate enterprises and listed companies in particular. These measures are aimed at promoting (i) good governance; (ii) long-term sustainable development; (iii) the transition towards a more environmentally-friendly production model; and (iv) respect for company stakeholders’ rights. ESG aspects are thus slowly falling outside the scope of soft law and becoming increasingly regulated through binding provisions.

Generally, the developments described below seek to enhance ESG reporting:

  • Annual Report on Climate Risk and Transition towards a Sustainable Economy

Act 7/2021 requires listed companies to include in their directors’ report an annual report assessing the financial impact of climate change risks arising from their activities’ exposure to climate change, including the risks of transitioning to a sustainable economy and any measures to address them. Listed companies must submit this report to the Spanish Securities and Exchange Commission (CNMV) together with the annual accounts.

Within two years from the passage of Act 7/2021, regulatory provisions will be adopted specifying the contents of the report. In any case, the report must refer to: (i) the role of the company’s governing bodies in finding, assessing and managing climate change risks and opportunities; (ii) entities’ strategic approach to manage the financial risks related to climate change; (iii) the actual and potential impacts on their activities of climate change risks and opportunities; (iv) any climate risks identification, assessment, control and management processes; and (v) the metrics, scenarios and objectives used to assess and manage any relevant risks related to climate change.

  • Employee engagement mechanisms

Act 5/2021 amends the Code of Commerce so that companies required to submit non-financial statements now have to add, under the social security and employee information, any mechanisms and procedures implemented by the company to engage employees in management, in terms of information, consultations and participation. These mechanisms will not be effective until April 13, 2022 and, in most cases, they will have to be disclosed in the non-financial statements at December 31, 2022, subject to approval in 2023.

Regarding non-financial statements, note that the European Commission has issued a proposal for a Corporate Sustainability Reporting Directive, focusing on the streamlining and standardization of the metrics, structure and verification of sustainability reports. The proposal seeks that (i) sustainability reporting become more consistent; and (ii) investors and society as a whole could use comparable and reliable information.

  • Identifying the gender pay gap

The annual report on directors’ remuneration (ARDR) must include information on the total amounts, and any annual variations, for the following categories: (i) each director’s remuneration; (ii) the company’s performance; and (iii) the average remuneration on a full-time equivalent basis of company employees other than directors over at least the five most recent financial years. This information will be presented together to allow for comparisons.

This new reporting requirement introduced by Act 5/2021 would affect ARDRs for financial years ending after December 1, 2020. Note that its effective date has not been coordinated with that of the new regulation on listed companies’ remuneration policy, which would require companies to adjust their remuneration policy on the first general meeting held from October 13, 2021.

  • Remuneration of listed company directors

Act 5/2021 has generally promoted (i) transparency regarding directors’ remuneration–thus strengthening shareholders’ right to have a “say on pay”–and (ii) that remuneration be linked to the long-term sustainability of companies and non-financial performance criteria. Act 5/2021 provides the following:

– Executive directors’ remuneration schemes must be provided in the bylaws, and this remuneration must be in line with the corporate bylaws, the remuneration policy and any agreements concluded with the company. Note that the General Directorate for Legal Certainty and Authenticity issued a resolution on June 4, 2020 confirming that executive directors’ remuneration schemes can be included in corporate bylaws.

– The remuneration policy should state how it (i) contributes to the corporate strategy and to the company’s long-term interests and sustainability; and (ii) considered the remuneration and employment conditions of company employees when establishing the directors’ remuneration policy.

– The remuneration policy should (i) lay down clear criteria for granting variable remuneration schemes; and (ii) set the financial and non-financial performance criteria including, if appropriate, any corporate social responsibility criteria, explaining how they help to achieve the company’s objectives.

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