Quite why already handsomely remunerated executives should be rewarded for making business decisions that will ensure their businesses survive into the next century is beyond me. But there is no denying that money talks. And perhaps this is a way to ensure that companies meet their climate targets faster?
The devil, of course, is in the detail. What is a meaningful target? And how do you measure it? But I’m getting ahead of myself. The push for this is coming from global shareholders who want to see companies link executive remuneration to ESG-related metrics, and the coronavirus pandemic has only added to this momentum.
Larry Fink, chair and CEO of BlackRock, the world’s largest asset manager, with more than $9.4-trillion in assets under management, tackled the subject in his 2021 letter to CEOs: “I believe that the pandemic has presented such an existential crisis – such a stark reminder of our fragility – that it has driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives.
“It has reminded us how the biggest crises, whether medical or environmental, demand a global and ambitious response.”
In line with this, two-thirds of institutional investors are now in favour of linking executive compensation to ESG performance. That’s according to a survey released in November by public relations firm Edelman. It had polled 600 institutions, including asset managers, in six countries representing firms that manage a total of $20-trillion.
In addition, nearly half (45%) of FTSE 100 companies have an ESG measure in either their annual bonus targets or longterm incentive plans, according to Paying Well by Paying for Good, published in March by PwC and the London Business School’s Centre for Corporate Governance.
Deloitte notes in its Executive Remuneration Report 2020 that in South Africa climate change, risk and governance (public and private sector) are front and centre, with pressure rising for disclosure and mitigation action.
This is being driven by the likes of Just Share, a shareholder activist organisation that is pushing South African banks to implement more stringent policies on financing activities related to thermal coal.
Banks on board
Some banks are confronting these issues head-on.
Nedbank recently halted direct funding of new oil and gas exploration actions and has committed to aligning its business with the terms of the Paris Agreement.
At Standard Bank’s recent AGM the bank confirmed a commitment to publishing a climate strategy and targets for reducing fossil fuel exposure.
Coronation Fund Managers announced it would be adopting a stronger stance on ESG following engagements with almost 90 JSE-listed companies.
Ninety One has also come out strongly on the subject of climate-related investing.
Recently, CEO Hendrik du Toit cut to the chase, saying that asset managers who pick and choose investments that make them look green are taking the easy route.
Without having to advocate for real-world carbon reduction (with the companies concerned), they aren’t effecting the kind of change needed to tackle the climate crisis. They are leaving the problem of heavy emitters to others, he said.
Deloitte added that an increasing proportion of South African executive annual bonuses are tied to company sustainability targets, in addition to targeted company financial performance metrics. Pay, it seems, helps to play a part in focusing the board’s attention, driving ESG ambitions and delivering a “tone from the top”. But how does one do this in a way that does not simply pay lip service to the subject?
The first thing, says Ninety One’s Nazmeera Moola, is to set specific ESG targets that are relevant to a particular company’s industry and company. Of course, these targets need to be externalities that they have some control over and that will have a long-term effect on the value of the company, she says. The next challenge is to identify quantifiable measures that can be applied to those targets.
And lastly, boards need to set the target so there is an appropriate amount of stretch, making it neither too easy nor too hard for senior executives to reach.
This is no mean feat, given the dearth of historical data on this subject, but I guess we have to start somewhere.
I would assume, too, that these targets are linked to a long-term incentive scheme.
If the already well-remunerated chief executive of a fossil fuel company is to be rewarded for transitioning the company into a renewable energy firm, then surely the reward needs to be tied into long-term, not short-term, incentives?
Clearly, corporate and remuneration advisers will be kept busy into the future.
While I understand all of this, I can’t help wondering where the line should be drawn. Is incentive pay supposed to reward executives for every single metric or responsibility that’s part of their job?
Pay, it seems, helps to play a part in focusing the board’s attention, driving ESG ambitions and delivering a ‘tone from the top’. But how does one do this in a way that does not simply pay lip service to the subject? DM168
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