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Executive pay, the next gen, and climate change

With a hefty prod from next-gen, family offices are steadily extending their commitment to the fight against climate change. Members of the Rockefeller family led the divestment of investments in fossil fuels in 2014. 

A survey by UBS in 2019 found that 53% of families agreed climate change was the biggest single threat they faced. Pension schemes and a fair number of corporates are belatedly raising their game.

Willis Towers Watson said half the companies in the S&P 500 index use ESG goals in incentive plans in various ways: “But few give them the importance it deserves.” It estimates that no more than 4% of long-term incentive plans embrace ESG metrics 

Auditors are even discussing the incorporation of sustainable factors into mainstream corporate accounting standards, to make good the confusion and deficiencies which surround a variety of ESG benchmarks currently used by activists.

However, a deafening silence surrounds the scale of executive pay which can be influenced by the occasional green metric, but never takes full account of the impact of boardroom decisions on the planet.

The importance of the subject has not eluded Mark Carney, former Bank of England governor, who said in October that banks should link executive pay to the management of climate risks.

Leading banks have often voiced their commitment to hitting net-zero carbon emissions by 2050 but they have broadly failed to spell out their commitment to the green pay idea.  But Deutsche Bank broke ranks in December to link executive pay to its progress in meeting sustainability goals. 

Its new policy will measure the scale of its sustainable loans and take account of a rating assessment of its ESG stance. It has also pledged to convert its buildings to be powered by renewable energy by 2025. 

BNP Paribas has tied 20% of its pay to meeting ESG criteria.  HSBC and UniCredit also take some account of the issue. JP Morgan is considering the idea.  Under pressure from its shareholders, Shell executives agreed to link executive pay to carbon emission targets in 2018 and rival oil majors like BP and Total are inserting ESG metrics into pay discussions. 

A range of other companies are making a nod in the same direction. 

Earlier this year, Simon Patterson, managing director of pay consultant Pearl Meyer, said progress had been made. 

But he added: “The impact is often muffled. ESG measures can lack a specific weighting in the overall incentive plan and just be included as one of a number of broad objectives against which senior managements are judged as a basis for assessing annual incentive payouts.”

In December, consultant Willis Towers Watson said half the companies in the S&P 500 index use ESG goals in incentive plans in various ways: “But few give them the importance it deserves.” It estimates that no more than 4% of long-term incentive plans embrace ESG metrics. 

Asset managers have embraced sustainability but far too often as a source of fee income. Fund launches can be sloppy. In a recent survey, Common Wealth, the think tank, found that a third of ESG funds in the UK have invested in oil and gas stocks, while a third are driven by technology and financial sector rather than decarbonisation. 

Managers remain coy when it comes to pushing for fairer, or greener, executive pay packages for fear of causing offence. One equity manager once told me it was high time executive pay fully employed green benchmarks but refused to go public because it would upset her boss – and his unsustainable pay scales.

Asset managers should know better. Millennials are not only inheriting family offices. They are moving into positions of influence across the financial sector. They expect transparency. And according to Morgan Stanley, 67% of them devoutly believe their investment decisions are a way to express social, political and environmental values. 

Around 58% of employees consider a company’s social and environmental commitments when deciding to work.

No less than 91% of investors managing $26 trillion, according to advisory firm Morrow Sodali, believe climate change is now their top engagement priority. 

Around 81% said poor disclosure of performance targets ought to lead to a vote against executive remuneration. We should expect a lot more debate relating to the sustainability of executive pay and rations in the coming years. 

After all, nobody likes a free rider.

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