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The ESG Review: Executives accused of gaming ESG metrics to boost bonuses

With a growing number of listed companies tying levels of board-level bonuses to ESG metrics as well as financial performance, an article this week outlined growing investor concerns that bosses are “gaming” the system.

A detailed piece in the Financial Times set out how top earners could draw bonuses against their achievement of “fluffy” ESG objectives in lieu of what would have otherwise been reduced takeouts because of relatively soft financial achievements for shareholders.

It references more than half of the S&P 500 businesses now having executive bonuses tied to diversity, equity and inclusion initiatives, and that one asset manager had never seen a company score itself as less than the median against employee engagement metrics.

“Unlike financial metrics tied to earnings or share price performance, it is almost impossible for outsiders to tell if ESG pay metrics are worthwhile,” the article said.

Other asset managers did support linking top bonuses to decarbonisation achievements that could be measured scientifically, it added.

Which is surely the main point. For any bonus, given for any reason, arbitrary or subjective reasons for the pay award always stand to be criticised or counterproductive versus the bonus level having at least a strong component of objective achievement against clearly measurable and defendable metrics.

The issue is really just another log on the fire of the debate that continues to rage about the validity of ESG metrics for investment decision-making and as a mainstream measure of corporate performance. This week also saw investment manager Vanguard further soften its stance on ESG investments, with plummeting support for other shareholder resolutions on climate and social action.

FT Adviser reported that the tide may have turned for ESG funds, with net outflows now exceeding inflows over the course of this year.

Yet the very largest investors are seemingly continuing with their commitments to put more and more money behind companies making progress on ESG, with Morgan Stanley reportedly now 70 per cent of the way there in its aim to invest $1 trillion.

The political crossfire over ESG will surely continue, and likely intensify ahead of elections in several major economies over the coming year or so. As will the pot-shots over ESG metrics needing to be more robust and objective, whether they underpin overall corporate valuation or a case for a bonus pot.

In the background, investors will need to continue to figure out how to balance risk and opportunity, and their moves should keep ESG evolving regardless of its deficiencies. As this recent opinion piece on new generations of funds emerging put it, “there is growing interest in capturing value from investing in companies enabling a faster transition”, particularly in areas like the energy transition and energy security.

“Incorporating 21st century risks and opportunities in these areas will become mainstream for investment portfolios,” it concluded.

The ESG News Review is written by Steve Earl, a Partner at BOLDT.

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