ESG-driven remuneration

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With growing numbers of companies examining the role of ESG and sustainability in their daily operations and corporate strategy, it stands to reason that the ability to deliver on ESG commitments may start to have a larger bearing on executive remuneration, and the failure to deliver on ESG commitments should have an adverse impact on said remuneration. As ESG AUM is forecasted to reach US$33.9 trillion by 2026, it is apparent that increasing ranks of investment managers across both public and private markets are incorporating ESG and sustainability into their investment practices, whether due to outside pressure or to align with internal beliefs, and that this is an area likely to receive increased attention in the coming years.

This digest will examine the drivers behind integration of ESG key performance indicators (KPIs) into executive remuneration within the asset and wealth management (AWM) industry; the ways in which remuneration can be linked to ESG for asset managers investing in public and private market assets; specific case studies where ESG integration to remuneration KPIs has been or is being implemented in Asia-Pacific (APAC) and; how this compares to Europe. It also delves into the challenges faced when linking remuneration to ESG KPIs.

Key takeaways

With growing emphasis on aligning business practices with the principle of doing well by doing good, expectations are on the rise. While some may view the integration of ESG into remuneration as a means to enhance reputations, academic literature increasingly provides evidence that sustainability positively influences the bottom line and shareholder value.

As product manufacturers, they can create ESG funds. As institutional investors, they can direct substantial amounts of investment towards relevant sectors and companies. As managers of retail investors’ retirement funds and other monies, they are usually prominent investors in public companies and able to exert substantial pressure on boards of directors and CEOs via the voting rights afforded to them as such an investor. Accordingly, their influence extends across both their external application of ESG KPIs when it comes to invested companies, and their own when setting executive compensation.

Today, the disparity in disclosure rates regarding the utilisation of ESG metrics in incentive plans between the APAC region (63%), the EU (91%), and the US (69%) underscores a significant opportunity. This gap highlights executive compensation as a potent lever to propel decarbonisation efforts forward.

Asset managers who do incorporate ESG KPIs into their remuneration frameworks appear to do so on an ad hoc basis, creating their own models and metrics to apply. Whilst this may lead to a greater range and more relevant KPIs to measure against, the methods for setting targets and calibrating them are often untested, and best practices remain scarce.

ESG-linked executive incentives are deemed to serve as a mechanism amongst investors and other stakeholders to create accountability for actions that are aligned with corporate goals and supporting targets. Linking financial incentives to actual performance in the ESG and sustainability space, specifically, when tied to specific and measurable KPIs, provides accountability and responsibility in a transparent and measurable way.

Conclusion

With ESG AUM forecasted to represent 21.5% of global AUM within five years from 2022, asset managers operating in both the private and public investment sectors and all regions of the world partaking, it seems inconceivable that some aspects of an asset manager’s remuneration will not be linked to KPIs pertaining to ESG and sustainability. This is because industry stakeholders will likely expect substantiation for all ESG funds which highlights the need for clear KPIs and measurement methodologies.

Linking financial incentives to measurable ESG performance fosters accountability and transparency. However, it is crucial to ensure that such measures remain focused on intended objectives rather than mere targets for executive pursuit.