Environmental, social and governance (ESG) factors are increasingly present as a feature of good corporate governance and as a key issue of interest for investors.
It is not surprising that more companies than ever are using ESG metrics as an important cog in the broader machinery of their reward arrangements: as the Financial Times recently reported, the latest data from ISS ESG suggests that the number of companies that include ESG metrics in their remuneration determinations has doubled since 2018.
This, in tandem with increased investor interest in ESG, forms something of a virtuous circle; the more companies embed it in their remuneration arrangements, the more it becomes a feature which investors will expect to see, and so on.
The opportunities associated with engaging with investors on this topic are significant. In its report on “How ESG engagement creates value for investors and companies”, the UN PRI1 identifies several such opportunities, some examples of which include the opportunity for a company to:
- clarify its investors’ expectations surrounding ESG topics;
- rectify misrepresentations and manage investors’ views of the company; and
- anticipate upcoming trends and issues and develop broader knowledge and understanding of ESG issues.
Whether or not you choose to proactively engage with them, there is likely to be increasing pressure from investors who will want answers as to how you approach ESG, including whether and how you link ESG to pay (and if not, why not).
This uptake in the inclusion and importance of ESG metrics has also prompted developments of disclosure frameworks and reporting standards against which to measure progress. Disclosure obligations are likely to become increasingly mandatory (as the TCFD2 recommendations have in a limited sense become – as to which see below), so it is important to start thinking about ESG and how it fits in with your remuneration policies and plans. If you are not already doing this, now is the time to take action. If you are already doing it, you will want to make sure you are getting the most out of your efforts.
In this briefing, we want to share with you the result of our survey of the remuneration reports of the FTSE 100 companies looking at what companies are doing in relation to ESG and remuneration. The survey reveals some interesting features and a snapshot of what the UK leading companies are doing in this space. Later in the briefing, we also consider in more detail how companies that have not yet considered ESG in connection with remuneration may go about doing so.
We are doing a lot of work in this space at the moment and would be very interested in hearing from you about your experiences and goals where ESG is concerned. We would also be delighted to speak to you about what we are seeing in the market and the direction of travel so please do get in touch.
FTSE 100 survey
Last year, the Macfarlanes Reward team completed a “FTSE100 - ESG and Pay Survey” which gave us an invaluable insight into the current state of affairs when it comes to actively taking steps to linking ESG to remuneration. Not only that, the survey also gave us an insight into the way in which companies are using their remuneration arrangement as a means of achieving their ESG objectives.
For example, the survey showed that that over half of the FTSE 100 heavyweights talk about ESG in their remuneration reports. Secondly, over two thirds of companies that mention it have incorporated it as something that has a tangible impact on the outcome of their remuneration arrangements.
While 56 of the FTSE 100 companies surveyed made some mention of ESG in their remuneration reports, this did not consistently translate into ESG featuring tangibly in their remuneration arrangements. The survey showed that 9 of those companies included ESG only as a statement of intent but stopped short of linking it directly to pay outcomes. By contrast, the remaining 47 companies went further and incorporated ESG in their remuneration arrangements as something that could have an actual impact on remuneration pay-out.