The Guerdon Associates and CGI Glass Lewis 14th annual Governance and Remuneration Forum held a panel on non-financial risk. The Forum panel and discussion were held on 12 March, just prior to social distancing regulation taking effect.
This article summarises this panel discussion.
A wide range of issues were raised by the panel and the audience, with major points including:
- As the consequences of non-financial risks are financial, they are poorly termed.
- Proper management of non-financial risk involves treating the long-term material risks, for example those related to climate change, as seriously as short-term more direct financial risks.
- The more material ESG risks vary from industry to industry. The sustainability framework of the SASB provides good guidance on this.
- ESG risks should have the same kind of dashboards as those developed for financial risks. It should be clear what success and failure looks like.
- It is difficult to incorporate long-term non-financial risks into the three to four-year term of a traditional remuneration framework.
- What would be more in line with the time period of long-term financial risks would be retirement payments that are made in shares, or annual grants of equity that are restricted for 15 to 20 years.
- One way to incorporate ESG factors into remuneration is with a malus policy that is acted upon.
- Disclosures on ESG are inconsistent (see HERE) . While it is difficult to compare companies as yet, the panel considered the SASB and TCFD disclosures were good frameworks to follow.
- It is difficult for investors to easily review and consider a company’s ESG information and position. It is generally split over multiple reports such as the annual report, sustainability report and sustainability data pack.
- Requiring non-financial risks to be 50% of LTI as proposed in the CPS 511 exposure draft (see HERE) was considered flawed for many reasons. One reason is that some non-financial measures, for example culture, serve a better role as a modifier than as a proportion of an incentive. Having a strict blanket rule will cause significant problems for the design of certain plans. It is noted that the CPS 511 proposal has been withdrawn and is under further consideration by APRA. The revised version has been deferred during the pandemic.
- When activists bring up shareholder proposals (see HERE) they should be engaged with rather than dismissed. If a shareholder is asking about the company’s plan to deal with material non-financial risk, the question should not be who launched the proposal. It should be what is the company plan for dealing with that material non-financial risk. If there is no plan, then the question is why?
- A board needs to show it has an understanding of the ESG issues relevant to its company. A sustainability committee may be helpful if a board feels it is best to delegate consideration of these issues to a focused independent committee .