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The ESG Review: Tying ESG change to executive pay

It has been nearly four years since many more UK companies were compelled to disclose CEO salaries versus medians across the business, as pressure grew for greater transparency over executive pay.

And with new European Union legislation, the Corporate Sustainability Reporting Directive, due to be finalised next month that will up the ante on ESG disclosures for the majority of large companies with EU operations from January, communicators are having to take that in their stride too.

Now though, there are growing signs that those two factors will increasingly come together. With the climate crisis and the Ukraine war both receiving top billing at the United Nations General Assembly in New York this week, activist investors are increasing calls for ESG progress - particularly towards environmental goals - to be tied directly to senior salaries.

Executive reward has of course been in the headlines this week as the new Prime Minister defended the prospect of the cap on bankers’ bonuses being lifted. But as the Financial Times wrote in an article on where ESG meets boardroom pay, “as activists seek to push companies to cut emissions and improve diversity, they are zeroing in on executives’ wallets.”

The piece went on to cite several examples of companies that had been progressive in linking top earners’ pay to environmental and social goals, and other firms that had defended themselves against demands for such moves. Quite how successful activists will be remains to be seen, but merely spotlighting the issue may trigger some discomfort and discussion on how best to get ahead of the issue given the rising tide of disclosure obligations.

My social media feeds have been particularly busy of late, but the ESG topic that has stirred the greatest fervour is the billionaire founder of clothing brand Patagonia committing to give the company away to help fight the climate crisis. Lauded as the ultimate personal gesture in business, stories like this - well, there may well not be others quite like this - only turn up the dial on executive pay and whether leaders should be rewarded for stakeholder gains rather than just those of shareholders.

At the same time, ahead of COP27 we can expect to see more focus on biodiversity loss as an environmental risk to rival that of climate change. As the FT put it in covering two recent deals by large asset management companies that prized species preservation, they “reflect a belief that what gets measured gets managed” and that “biodiversity is the living component of natural capital.”

As with so many other aspects of ESG though, the challenge will be instilling consistent and uniform methods of reporting on positive action. But regardless, biodiversity is the fastest-rising ESG topic in capital markets.

As pressure builds through the global summits and political commitments this autumn, we may well see more executive reward commitments linked not just to current headline change goals, but to those that will require profound longer-term action.

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

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