ESG and Executive Remuneration—Disconnect or Growing Convergence?

Autores: Peter Reilly and Aniel Mahabier

Data publicação: 2019

In recent years, the level of capital flowing into funds that incorporate ESG criteria has grown considerably and what was once an issue on the fringes of investment is increasingly part of the material financial analysis of a company’s value.

Consequently, ESG rating agencies (who help investors identify ESG risk) have grown in prominence; regulators have commenced a clampdown on so-called “greenwashing”; and, investors continue to pressurise companies to provide greater details on ESG factors likely to affect their business—either through engagement or, less frequently, shareholder proposals. Indeed, a recent report found that, at least based on publicly disclosed documents, climate change was the number one issue for institutional investors in their stewardship of investee companies.

In this post, we have analysed whether the ratcheting up of pressure on companies to enhance their ESG frameworks has permeated another important area—executive remuneration at UK and Irish companies. For three decades, pay has been identified as a key driver of C-suite behaviour. Despite what appears to be a relentless focus on ESG, the incorporation of ESG measures into executive pay packages has lagged somewhat.

While there has been a rise in the prevalence of such measures, they remain on the periphery. Only 27.4% of FTSE 350and ISEQ 20 companies have included some form of measurable ESG criteria in incentive plans. Even at those companies, however, the proportion of pay being driven by ESG performance is small.

This is despite companies across Europe being required to include non-financial statements in their Annual Reports; and every FTSE 350 company being expected to set out non-financial Key Performance Indicators (KPIs) in their Annual Reports. If a group of KPIs are not being replicated in incentive plans, there may be a danger that remuneration frameworks are becoming disconnected from corporate strategy. Or do Boards and investors see ESG measures as effective risk management tools as opposed to opportunities to drive value?

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