ACSI, executive pay and ESG factors

The Australian Council of Superannuation Investors (ACSI) represents superannuation funds that account for about 16% of Australian superannuation investments.  It recently published its report on sustainability reporting practices in the ASX 200.


ACSI’s approach is based on the premise that environmental, social and governance (ESG) risks have a material effect on the long-term viability of companies.  Thorough disclosure of information regarding company performance in relation to these ‘sustainability risks’ is therefore integral to quality investment decision making.


ACSI’s research indicated that while there have been some minor improvements in sustainability reporting over the five-year research period, the majority of ASX200 companies are yet to provide sufficient reporting on their performance against sustainability risks.


ACSI supports a campaign to “Report or Explain”.  The core proposition of the principle of Report or Explain is that all large companies should disclose their sustainability performance, or explain why they have not done so. ACSI indicates that the principle could be implemented in various ways, including through soft regulation, listing rules or other mandatory measures.


ACSI said that it will be lobbying the Australian Government on Report or Explain within the Australian context.


In their report ACSI expressed support for linking executive pay to sustainability objectives, citing global research by proxy adviser Glass Lewis.


Glass Lewis’ 2011 annual review, entitled “Greening the Green”, explored the link between compensation and sustainability in various markets to determine which companies have chosen to link executive remuneration to sustainability metrics and how this has been accomplished.


The Glass Lewis research found that 29% of companies had linked executive remuneration to sustainability (as at October 2010).


Australia led international peers, with 60% of ASX20 companies disclosing this link.


Occupational health and safety (OH&S) metrics were the most frequently used of any executive performance metric. The report suggests that this is due to health and safety of employees “representing some of the most direct and visible links to shareholder value.”


No mention is made of director liabilities as a possible reason for the frequency of this metric.


The Glass Lewis report also drew a distinction between “positive” and “negative” sustainability metrics. OH&S is described as a negative metric, because OH&S management protects the company against diminishing production potential, injury compensation and reputational losses. In contrast, diversity, which was another popular sustainability metric, is described as a positive metric because it has the potential to enhance shareholder value.


The Glass Lewis report concluded that companies and shareholders would benefit from:

·    Homogenisation of sustainability terminology;

·    Harmonisation of corporate disclosures to facilitate cross-company comparisons;

·    Devising objective, measurable performance criteria over which executives have direct influence; and

·    A reorientation from short to long-term incentive schemes regardless of the chosen metric.


ACSI supported Glass Lewis’ conclusions. The ACSI report is available HERE.

© Guerdon Associates 2024
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