The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

March 16, 2022

ESG Metrics: European Co’s & Investors Continue to Push Forward

As I wrote yesterday a growing number of commentators are taking issue with the concept of using ESG metrics in executive pay plans. They say the risks outweigh the benefits, and that there are better ways to encourage sustainable, long-term performance.

Yet, those red flags aren’t deterring some investors. Particularly in Europe, asset managers & owners continue to urge companies to add non-financial targets to pay programs. To counter the shortcomings of discretionary ESG factors, the investors typically want these metrics to be measurable, transparent and linked to publicly disclosed E&S pledges. This Proxy Insight article recaps new policies by a couple of Europe-based institutions. Here’s an excerpt:

AllianzGI updated its 2022 proxy voting policy on February 22, revealing that the $743 billion asset manager will vote against European large-cap companies that fail to include ESG key performance indicators (KPIs) in their executive compensation structures.

Harlan Zimmerman, senior partner at Cevian Capital, similarly said in an interview it was “critical” that executive compensation is used to incentivize companies to accelerate engagement with climate change.

AllianzGI supported 23.8% of advisory “say on pay” proposals internationally in 2021, compared to 24.3% in 2019 and 23.5% in 2020, Proxy Insight Online data reveal.

Both AllianzGI and Cevian want companies to break down their climate goals into short-term targets and provide evidence of progress being tied to executive compensation awards.

A number of companies are responding to these investor preferences by tying pay to ESG goals. UBS – which is headquartered in Switzerland and a foreign issuer here – is one of the latest. In the GRI-aligned sustainability report that it recently published, it shared details (pg. 33) of a new compensation scorecard that includes quantitative & qualitative ESG metrics. The company’s compensation plan also includes group metrics based on climate & people goals that are tied to corporate strategic initiatives.

Although the jury is out on whether ESG metrics will deliver the right kind of progress on corporate environmental & social goals, it’s worth keeping an eye on European ESG trends & practices – because they often make their way to the US.

Liz Dunshee