ESG+ Newsletter – 21st April 2022

Return of the executive bonus

Pay for FTSE 100 chief executives bounced back to pre-pandemic levels after increasing by a third in 2021, as some sectors experienced a post-Covid boom amid performance being measured against conservative targets. According to a PwC study, based on the review of the first 50 FTSE 100 companies to publish their 2021 annual reports, CEO median remuneration increased by 34% from 2020. The study found that this was predominantly driven by an increase in bonus awards, which jumped to 82% of maximum opportunity, from 44% in 2020 and 66% in 2019. The trend was replicated in Ireland, where median remuneration of executives at eight out of the top 10 companies listed on the ISEQ 20 index rose by 66% last year to €4.79 million, almost double from 2019, as per the Irish Times. The impact of the Covid-19 pandemic prompted companies to show financial restraint and incorporate considerations beyond profit in their decisions, with investors placing additional scrutiny on companies that have received financial support from Governments, cut dividends or deferred share buybacks. In addition, the widening gap between the treatment of C-suite and employees means that there are likely to be significant levels of dissent across the UK and Ireland throughout AGM season. In response, Governments may be looking to restrict pay more forcibly. Emmanuel Macron has proposed the regulation of executive pay at the EU level, including hard caps on pay.

AGMs to the fore in climate and purpose battles

ShareAction argues that investors must use their votes this AGM season to vote against climate plans which fall short of the action required to achieve the goals of the Paris Agreement. ShareAction, a charity set up to drive change towards responsible investment, works with investors to identify companies whose transitions plans fall short of best practice. Banks are under particular scrutiny from ShareAction due to the role the financial system will play in financing the decarbonisation of the economy (or not). Even for institutions without Say on Climate proposals, scrutiny of climate plans is mounting. ShareAction recently filed a resolution at Credit Suisse asking the company to improve its climate risk disclosures, bring its fossil fuel policies in line with leading practice, and publish targets to reduce its fossil fuel exposure on a timeline consistent with the Paris Agreement. Climate strategy is becoming an increasingly challenging topic for companies to navigate during the AGM season. Ultimately, every listed company has to go in front of shareholders and stakeholders at least annually and, as the Economist discusses, outsiders are using that pinch-point to pressurise Boards and management teams. As the sophistication of climate plans grow, and the expectations of investors simultaneously rise, companies should endeavour to ensure Say on Climate proposals are aligned with industry best practice – in terms of targets, engagement and reporting.

Companies challenged to think beyond “old ways” regarding ESG investment

Over the past number of weeks, we have detailed how certain commentators are becoming more sceptical of ESG as an investment concept and why it is fundamentally flawed. In a recent article for Harvard Business Review, Paul Polman and Andrew Winston argue that companies and investors are still hindered by the “old ways” in which they view ESG investment. The argument put forth by Polman and Winston is grounded in good reason, arguing that company executives will spend large amounts of money on business development, R&D and M&A, but when investing in the future of the business and humanity – reducing energy use, transitioning to renewable energy, and paying living wages – they hesitate, viewing this as a cost and not an investment. This type of thinking, they argue, is holding back the integration of ESG across business and investment that will help materially reshape how companies operate. The article outlines five key reasons why executives are reluctant to make ESG investments and then deconstructs the rationale behind this decision-making, while also proposing solutions for getting past these inherent structural biases in thinking around ESG.

Some companies are adjusting their business strategy to ensure that some of the core philosophies of ESG are embedded across their business. This week Mastercard announced that it was expanding its previously announced executive bonus plan that was linked to ESG goals to all employees’ compensation plans. While companies may still be hesitant to invest in the new frontier of long-termism, there is growing evidence that performance appraisals are being aligned with certain key objectives.

Researchers challenge the efficacy of Scope 3 rules

In a recent Harvard Business Review article, Robert S. Kaplan and Karthik Ramanna argue that the process for tracking Scope 3 (indirect) emissions is ineffective and could even be counterproductive in reducing carbon emissions. The article claims that reliable data for suppliers is often unavailable and that companies often use industry estimates to fill gaps in their own data. In their view, this allows companies to take credit for the work of others, greenwash, and report misleading figures. They recommend phasing out industry-wide standards and setting up a system focused on collecting primary data.

The current Scope 3 standard recommends that companies rely as much as possible on emissions data gathered directly from suppliers and other partners, and an increasing number of large companies are demanding emissions data from their suppliers accordingly. The SEC’s proposal requires companies to provide Scope 1 and 2 climate disclosures by 2024, but provides a litigation safe harbor for companies voluntarily providing Scope 3 disclosures, taking the point that Scope 3 emissions may be harder to track. While it is clearly more difficult to control the behaviour of others than yourself, the reduction of emissions is of such importance that simply pointing to poor data cannot be enough. As procurement practices become increasingly detailed, surely there is an opportunity for companies to ask suppliers and partners to compete on data and performance. Further, there are certain analogies to other ESG areas where companies would not hesitate to demand evidence from their value chain, including on labour practices, bribery and corruption. Given the potential for emissions to have an equally disastrous effect on society, maybe it’s time for Scope 3 data to be on a par with those issues.

Investment community shows support for ethnicity pay reporting

One month after the UK Government both praised and urged caution on ethnicity pay gap reporting, Responsible Investor has reported that UK investors are pushing on with their own reporting efforts, while also supporting Diversity & Inclusion related shareholder proposals. The article also comments on the wider theme of racial justice, noting that US resolutions that can be categorised as such have increased 40% this year. With Social issues increasingly prominent on the ESG agenda than ever before, and with remuneration receiving the usual scrutiny during proxy season, ethnicity pay gap reporting sits at an interesting juncture. The direction of travel is clear, and the initiative will clearly be the recipient of both internal and external support in the months and years ahead. One group represents an aspect of the growing momentum behind corporate ‘stakeholderism’, while the other consists of investors looking for material indicators to guide investment choices, a key consideration of which is talent retention.

Real estate investors call for dedicated ESG metrics

A group of real estate investor associations have sent proposals to the UK’s financial watchdog on ESG reporting metrics it wants to become part of international real estate standards. The proposals “reflect cross-industry sector collaboration and input” and would assist in creating consistency for real estate reporting globally. The letter was also addressed to the secretariat of the Task Force on Climate-related Financial Disclosures (TCFD) and to the International Sustainability Standards Board (ISSB).  The associations called for metrics that are “broadly applicable across all real estate asset classes” such as carbon, water, waste, biodiversity and social value. Interestingly, in order to create comparability with other investment sectors, the proposal suggests that TCFD reporting should allow for carbon footprint intensity in the real estate sector to be measured by value. Consistency in reporting is a topic which has been written about extensively in our ESG+ Newsletters and continues to dominate the commentary around the ever-evolving ESG landscape.

In Case You Missed It

• The EU council agreed on a proposal to create European Green Bonds. The regulation will cover specific requirements for the use of the ‘European Green Bonds’ or ‘EuGB’ designation, as well as the registration system and supervisory framework for issuers of environmentally sustainable bonds. This will help finance climate-mitigation investments and will enable the EU to progress towards its climate goals.
• The Science-Based Targets initiative (SBTi) is developing a new Net-Zero Standard for the finance sector. This standard will be introduced in early 2023. On Tuesday April 12, SBTi released a ‘Net Zero Foundations’ paper which provides guidance for financial institutions on how to meet their net-zero targets by 2050.
• A Google Cloud survey revealed that ESG performance has become a top priority for executives. Most of the 1,500 surveyed participants, c-suite professionals from the EMEA region spread across 16 countries, answered they would agree to adjust their business models to increase ESG performance. However, on average, less than 10% of the company’s budget is invested in ESG efforts.
• In a GreenBiz survey, most respondents indicated that their company have expanded their sustainability teams and increased ESG spending and initiatives since 2020. Another survey cited in the article, which was conducted by PwC, highlighted the growing importance of having a Chief Sustainability Officer position. However, these professionals still lack the necessary support and empowerment to impact business strategy.

Gain insights and stay informed on ESG, sustainability, building back better or on any industry or topic that interests you here. To be added to the distribution list for our ESG+ Newsletter, please click here to input your details or email [email protected].