UK firms encouraged to tie senior staff remuneration to management of ESG risks and opportunities.
The Investment Association (IA) has urged FTSE 350-listed companies to make executive pay and bonuses at least partially dependent on performance against ESG metrics, given their increasing importance to company strategy.
Companies which have integrated the management of ESG risks and opportunities into their long-term strategies should factor relevant metrics into remuneration structures, the association added. Any such firms which have not yet incorporated ESG metrics into executive pay and bonuses should explain to shareholders how these will be incorporated into remuneration structures in future years.
In a letter sent to the chairs of remuneration committees at FTSE 350 firms, the association said ESG metrics should “flow through” into determining executive pay and bonuses and be “clearly linked” to company strategy.
The letter underlined key changes to the association’s annual pay guidelines as detailed in its ‘Principles of Remuneration 2022’ document.
Remuneration committees “should select ESG metrics that are quantifiable and clearly linked to company strategy,” said the IA. “The rationale for the selected ESG performance metrics and targets should be disclosed to investors – as with any other performance condition.”
Incorporating material ESG risks into company strategy and remuneration structure requires firms to identify “quantifiable and appropriate performance metrics” and to set “appropriately stretching performance targets”, the letter noted.
UK corporates have been encouraged to factor ESG risks and opportunities into their business strategies by a series of regulatory initiatives, largely through disclosure rules. As well as requiring large UK corporates to report in line with the recommendations of the Task Force on Climate-related Financial Disclosures, the UK government unveiled plans during the COP26 climate summit to mandate companies to disclosure their net zero transition plans.
Individual asset managers, including DWS and Amundi, have also made clear their support for executive pay packages being tied to ESG-based KPIs.
“With COP26 focusing minds sharply on climate change, and more companies rightly linking executive pay and bonuses to ESG targets, investment managers will be watching closely to ensure these targets are both quantifiable, and linked to the company’s strategy,” said Andrew Ninian, Director of Stewardship and Corporate Governance at the Investment Association.
The Investment Association, which represents asset managers with £9.4 trillion in AUM, also said FTSE 350 firms which have not yet paid back pandemic-related government support should exercise restraint when setting executive bonuses.
In addition, the letter served notice that the association will also continue its campaign for greater alignment between pension contributions for directors and the contribution levels of the wider workforce.
Firms that do not heed the IA’s guidance risk member institutions voting against their remuneration policies and reports during next year’s AGM season.