The extent of environment metrics in executive incentives
10/10/2022
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Each year, Guerdon Associates and the GECN Group publishes its research report on global trends on the use of environmental, social and governance plus other non-financial (ESG Plus) measures in global executive remuneration (see HERE).

This is the second in this year’s series of articles prior to publishing the full research outcomes (see prior research HERE, HERE and HERE).

The scope of the research covers Australia’s S&P/ASX 100, the USA’s S&P 100, Canada’s TSX 60, France’s CAC 40, Germany’s DAX 40, Switzerland’s SMI 20, the United Kingdom’s FTSE 100, South Africa’s JSE Top 40 and Singapore’s STI 30.

In this second article we summarise our findings from this year’s research on the usage of Environment measures. The key takeaways are as follows:

  • All regions and almost all sectors showed increased usage of Environment measures;
  • Australia is falling behind Europe and South Africa and is now below the global average in the prevalence of Environment measures;
  • Emissions performance is the most common Environment metric and appears to be crowding out other measures;
  • Most of the usage growth of Environment metrics is in short-term incentives (STIs);
  • Whilst Environmental metrics remain less prevalent in long-term incentives (LTIs), there have been large advances in their usage at overseas companies, leaving Australia lagging behind.

Environment metrics are now incorporated in incentive plans by half of the leading companies in global markets, up from 30% in our 2021 study. While more companies in Australia are adopting Environment measures in executive incentive plans, overall global growth is primarily driven by companies in Continental Europe, the UK, South Africa and the USA.

Figure 1: Proportion of companies with Environment metrics by region

High polluting sectors – energy, materials and utilities – continue to be market leaders in incorporating Environment measures. However, the most significant year-over-year increases in usage were in other sectors, with Industrials, Health Care and Communication Services recording substantial upticks in usage from 2021. The majority of Utilities, Real Estate and Industrials companies now incorporate Environment metrics.

Figure 2: Proportion of companies with Environment metrics by sector

Emissions measures continue to be the most common Environment metric. This dominance appears to be crowding out the usage of other Environment metrics such as energy management, waste and hazardous materials management, environmental incidents, water management, land management and air quality.

The usage of all other Environment metrics has declined since 2021, which may have implications for risk management relating to natural capital and biodiversity.

Figure 3: Proportion of companies with Environment metrics by type of metric (among those with Environment metrics)

Note that percentages do not add up to 100% as some companies may use more than one Environment metric.

Short-term incentives continue to be the predominant vehicle for boards to incentivise Environment performance for both Australian and global companies. There were substantial increases in the prevalence of Environment metrics in STIs at global companies in the 2022 study.

Environment metrics remain less prevalent in LTIs, but overseas jurisdictions recorded significant increases in companies incorporating Environment metrics in LTIs in the 2022 study. Australian companies have begun to materially lag behind other jurisdictions.

Whilst Guerdon Associates is aware of some Australian resource companies introducing Environment metrics into their FY23 LTIs, this will likely not materially alter Australia’s laggard position relative to other markets.

Figure 4: Proportion of companies with Environment metrics by STI and LTI

Regulators have recently increased scrutiny of greenwashing (see HERE). We expect to see more companies linking performance on material sustainability matters to remuneration to build credibility of the commitments and ensure executives will be focused on achievement.

The GECN Group report on ESG in executive pay will become available late this year. To receive the report when it is published please contact us at info@guerdonassociates.com

You can review past reports HERE, HERE and HERE

© Guerdon Associates 2022
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