Tag: ESG compensation metrics

Happy Earth Day!

Climate Action 100+ reports that, last year, there were 22 climate-related weather disasters in the U.S. that “each caused more than $1 billion in damages—far and away a record. To investors, climate change poses not only physical risks of damage to assets, supply chains and infrastructure but also transitional risk if portfolio companies do not adjust rapidly enough as the economy decarbonizes and systemic risk posed to the entire economy.” According to environmental nonprofit Ceres, as of April 21, 408 businesses and investors “with a footprint” in the U.S. have signed an open letter to the President indicating their support for the administration’s commitment to climate action and for setting a new climate target to reduce emissions. The signatories collectively represent over $4 trillion in annual revenue, over $1 trillion in assets under management and employ over 7 million U.S. workers across all 50 states. The letter states that to “restore the standing of the U.S. as a global leader, we need to address the climate crisis at the pace and scale it demands. Specifically, the U.S. must adopt an emissions reduction target that will place the country on a credible pathway to reach net-zero emissions by 2050. We, therefore, call on you to adopt the ambitious and attainable target of cutting GHG emissions by at least 50% below 2005 levels by 2030.” As reported by the NYT and others, the President announced today that the U.S. is setting a new climate target with a goal of reducing U.S. emissions by 50% to 52% below 2005 levels by 2030.  The target “calls for a steep and rapid decline of fossil fuel use in virtually every sector of the American economy and marks the start of what is sure to be a bitter partisan fight over achieving it.”

How do we incorporate ESG factors into incentive compensation?

In BlackRock Investment Stewardship’s recent commentary, BIS observed that ESG-related metrics have increasingly been incorporated as performance measures in companies’ incentive plans. BIS cited a recent study from the GECN Group, which showed that 67% of companies in the study used ESG measures (but only 56% in the U.S. alone) and that COVID-19 had accelerated the incorporation of ESG factors into incentive plans. Importantly, however, BIS cautioned that, to the extent that companies included sustainability metrics in their incentive plans, they should “be material and aligned with a company’s long-term strategy. It is important that companies using sustainability performance metrics explain carefully the connection between what is being measured and rewarded alongside business goals and long-term performance. Failure to do so may leave companies vulnerable to reputational risks and undermine their sustainability efforts.” How do companies determine which sustainability objectives are most material for them, and how do they transform those goals into measures for purposes of incentive compensation? This new article from consultant Semler Brossy offers some advice.  What is the overarching message? “Move carefully, but move.”