Links between sustainability and executive pay continue to grow around the world, despite an ESG backlash accelerated by Donald Trump’s arrival in the White House for a second term.
Research from KPMG finds that 78% of 375 companies polled used sustainability measures in calculating senior executive pay.
Nadine Hönighaus, global ESG governance lead at KPMG, says transparency about linking pay to sustainability performance is key and should start with a small number of performance indicators.
She notes that the global economic uncertainty seems to have had little effect on the trend towards connecting remuneration to sustainability goals.
“Despite ongoing economic uncertainty, the findings make clear that linking executive compensation to sustainability performance is becoming increasingly widespread within the world’s largest companies.
“While there are some notable regional differences, there is a consistent global trend that reflects the crucial role senior executives play in steering a company towards long-term value creation.”
Material matters
The report looks at executives across hundreds of companies in 15 countries. As well as the inclusion of measures, 88% of companies align them to “topics that are material to their business”.
The most common targets linked to pay are cutting carbon emissions, improving the leadership opportunities for women, or cutting injury rates at work.
KPMG points out there are regional differences. Companies based in the European Union are more likely to use sustainability lines than businesses elsewhere, with the UK and Australia ranked second and third.
That chimes with EU efforts to introduce major new legislation to increase transparency and action on sustainability. The Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive, while currently undergoing amendment, are designed to improve corporate sustainability and climate transition.
The US has seen the largest backlash for imposing ESG responsibilities on corporates and KPMG research shows it is ranked bottom of 15 countries for inclusion of sustainability measures in executive pay.
A new low for the US
US aversion to ESG appeared to reach a nadir last week, when senior regulators at the US Securities and Exchange Commission voted to end its efforts to defend new mandatory climate reporting rules in a court case aimed at challenging their legitimacy.
The decision effectively kills the regulator’s effort to introduce the new rules. SEC acting chair Mark Uyeda dubbed the rules “costly and unnecessarily intrusive”.
Elsewhere, an expert review has passed as fit new reporting rules (IFRS s1 and IFRS s2) from the International Sustainability Standards Board for use in the UK. Work that would see them introduced as part of the UK’s mandatory reporting framework has yet to be completed.
Studies have looked at the use of sustainability linked pay schemes and concluded that not all executives that have such incentives pursue them.
Academics Leanne Keddie and Michel Magnan write: “While ESG incentives may help a firm mitigate the risk of investors’ or regulators’ intervention, they don’t necessarily translate into sustainability performance. We cannot reiterate this enough: a focus on ESG is a focus on risk and opportunity management, not sustainability.”
They warn that incentives “can be abused”.