Executive pay and climate change – higher expectations of oil and gas companies
09/09/2019
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You would be forgiven for thinking that non-financial targets are a major challenge only in financial services after the release of the draft APRA Prudential Standard CPS 511 (Remuneration) (see HERE) . Yet the collective clout of major superannuation funds is also taking the non-financial challenge to oil and gas companies.

This is consistent with large investors globally, which are taking an increasingly activist stance on issues such as climate change.

Several large Australian super funds (Australian Super, AMP Capital, HESTA, Cbus, QSuper, UniSuper, VicSuper) are members of the Climate Action 100+, a global investor initiative targeted at 100 global systemically important emitters with the goal of curbing emissions; improving governance; and strengthening climate-related financial disclosures.

Recently:

HESTA – demanded Australian oil and gas companies explicitly link  executive pay and the reduction of carbon emissions – not only their own but also their customers’ (‘scope three’ emissions). The view is that Australian companies are lagging in both their action and planning after the 2017 recommendation by the Task Force on Climate-related Financial Disclosures to link pay to emissions reductions.

ACSI – has also stated support for the inclusion of climate risk-management in pay outcomes.

Major Australian companies such as Woolworths, Telstra, Coles Group, CCA and Qantas (in addition to the four major banks) have also been asked by the Australian Conservation Foundation to cancel their membership of the Business Council of Australia (see HERE) . The Investor Group on Climate Change, a group of institutional investors with total funds under management of over $2 trillion, shares the frustration of the apparent divergence of company statements on climate change and the lobbying positions taken by the BCA (see HERE) .

Boards are on notice that justifying executive pay and incentive outcomes is not only about whether the company is making a profit but also about whether it is messing up the planet in the process.

In this, not only do investors appear to expect companies to punish their executives for failing to uphold the law, but also for failing to uphold other, less clear, standards.

Global resources companies have been ahead of many of their financial services peers in incorporating punitive malus systems in the event of non-compliance, especially in safety and environmental matters. However, going further than obeying the law may be venturing onto an uneven playing field. 

Without a legal requirement, some companies, genuine in their response, may incur greater financial costs than peers who choose not to do anything, or choose to do something on the surface, but nothing of any substance.

The large global pension and sovereign wealth funds, including Australian superannuation funds, may argue that they are levelling the playing field by insisting, for example, all oil and gas companies have incentive plans that recognise emissions performance. Yet, despite their fund size, their in-house ability to make an assessment of each company’s response is limited, while the MCSI and Sustainalytics indices are anything but nuanced. In addition, it appears that that for some funds at least, their zeal is focussed on listed companies, and not so much on the increasing number of companies they are taking private.

Nevertheless, there is no question that oil and gas companies, and progressively other resources companies, need to explicitly consider how their remuneration frameworks support environmental sustainability beyond that of compliance.

© Guerdon Associates 2021
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