ESG Putting the E in Executive Pay

Apple Inc. announced, on the 5th January 2021, in its proxy materials that they would incorporate a ‘bonus modifier’ in their executive officer’s bonus pay-outs, starting from 2021. The modifier will either increase or decrease the pay-out by up to 10% based on how the executive officer has performed with regards to the company’s values and their environmental, social and governance (ESG) goals. Apple Inc. has not expressed what metrics they will be using to determine this pay modifier, but this incorporation suggests that they want to encourage their executives to consider crucial ESG issues in their decision making.

 

Apple Inc. has a very good history regarding ESG-related issues and ranked 148 out of 511 in the Technology Hardware industry group by Sustainalytics. However, without clear regulations and standardised metrics, it is difficult to determine how much a company actually does with regards to their ESG issues. Many companies, especially those inter-related in sectors such as raw materials and energy, already have ESG related guidelines and metrics. These metrics are specifically focused on environmental issues and safety concerns, such as oil drilling, mining and hazardous waste management. These statistics and trends can be misleading and potentially misrepresent the current actions of a company.

 

Apple Inc. is not alone with this initiative. Volkswagen AG also announced before the beginning of 2021 that they would also link top executives’ bonuses to their ESG targets. In 2020, an ESG survey of board members and senior executives, by Willis Towers Watson, found that nearly 80% of employers plan to change their executive incentive strategies to incorporate ESG-related metrics and goals. Therefore, it is clear that that employers themselves see this action as a necessary move in the future.

 

Regulatory bodies are trying to make steps towards making ESG considerations a compulsory part of a company’s strategy and goals. As of 1st January 2021, the Financial Conduct Authority (FCA) now requires UK premium listed commercial companies to include a statement in their annual financial reports disclosing their climate-related risks and ESG opportunities. These statements must comply with the recommendation set out by the Taskforce on Climate-related Financial Disclosure (TCFD). If a company does not comply with this, they are required to provide an explanation of why it was not included and a plan on how they will include the statement in the future. This regulation will not affect Apple Inc. as they already include similar statements in the annual financial report, however this regulation could indirectly affect many companies that invest in fossil fuels related companies. HSBC Bank recently received pressure from its shareholders to fully commit to their new pledge to be carbon neutral by 2050, set out in their annual general meeting in October. The pressure was directed towards its lending to fossil fuel companies and many called for HSBC Bank to focus on decarbonising its portfolio.

 

Many companies are likely not ready for these moves to ESG related metrics and regulations; many of which do not have a consistent method of measuring. Regulatory bodies will need to give clear warning of these newly implemented regulations and a method of verifying the accuracy of these metrics. These moves have already seen by many companies, such as BP, Royal Dutch Shell and Occidental, diversifying their entire portfolio to fit the move towards renewable energy. Regulators will likely have the help of ESG focused investors and social pressures. The effect of this can been observed all over the world, for example, Huatai-PineBridge Fund Management Co photovoltaic exchange-traded fund (ETF) increased their assets under management by nearly 600% in a month to 10 billion CNY (1.55 billion USD).

 

The use of a ‘bonus modifier’ may be a very effective method of allowing executives to continue to work towards financial and performance-based goals, as well as, allowing them to reach their ESG-related goals. Many may question whether 10% will be a sufficient incentive to alter executive officer’s everyday decision-making, but alternatively the use of ESG-related indicators in long-term incentive plans are thought to be a more effective method. Unfortunately, these changes will not be coming into effect too quickly. The step taken by Apple inc. is likely to be the first of many and the result will not be apparent until 2022. The regulations set out by the FCA will likely be the first of many too, which will hopefully slowly shift the mindset of executive officers toward focussing on ESG issues as well as financial performance.

 

By James Waston-Gandy

Sector Head: Sophia Li

Posted in

Leave a Comment