Boards of directors and their compensation committees have long rewarded executives for financial achievements. Now, companies that do not include ESG goals in performance-based incentives could soon find themselves taking heat from investors.Getty Images/iStockphoto
A majority of Canada’s biggest public companies, including its largest emitters, now tie some portion of executive pay to achieving environmental, social and governance targets, but some industries are embracing the practice more than others, a study by the law firm Fasken Martineau DuMoulin LLP has found.
The survey revealed that 68 per cent of companies in the S&P/TSX 60 Index of large corporations offer chief executives and other top brass incentives at least partly based on meeting ESG objectives. Some of those companies are also among 40 high emitters chosen by the institutional investors group Climate Engagement Canada (CEC) as targets to push for tougher emission-reduction goals. Of that list, four-fifths link executive pay to ESG, Fasken found.
Conglomerates, transportation and environmental services, and oil and gas are leading sectors in linking compensation to ESG targets, with metals and minerals as well as financial services not far behind. The laggards are companies in industrial products and technology, with just 20 per cent adopting the practice, according to the survey.
The findings are among several in a report on ESG disclosure and governance practices in corporate Canada that shows how companies and their boards are prioritizing such issues as carbon reduction, biodiversity and water use, employee retention and Indigenous engagement and reconciliation. The survey shows industry is taking sustainability seriously, even as inflation, rising interest rates and worker shortages bring turmoil to the economy, and as ESG claims come under increased regulatory and public scrutiny.
Boards of directors and their compensation committees have long rewarded executives for financial achievements, including meeting profit and debt-reduction goals. Now, companies that do not include ESG goals in performance-based incentives could soon find themselves taking heat from investors who are themselves seeking to reduce risks that are non-financial but still material.
Ultimately, the ability to document progress with improving ESG metrics will influence the ability of companies to tap markets for financing when needed, said Gordon Raman, chair of Fasken’s ESG practice and co-author of the report.
“Particularly the larger companies – they spend a lot of time focused on investor engagement. And a lot of the things they’re doing are getting out ahead of what investors may want. It goes fundamentally right back to access to capital,” Mr. Raman said in an interview.
Many voluntary ESG measures, especially those involving disclosure of climate-related data, are on track to become mandatory as regulators such as the Canadian Securities Administrators and U.S. Securities and Exchange Commission finalize new rules. However, investors are already influencing corporate practices. “Investors are asking for these things. Investors want to be able to understand these issues, and companies are reacting,” he said.
The emphasis on ESG targets among the large emitters is not a surprise, given the importance placed on decarbonization in the economy by governments and within capital markets. Several major institutional investors, including asset managers and pension funds, formed CEC last year to influence those companies to improve their greenhouse-gas-reduction performance and disclosure practices. The group drew up a focus list of 40 companies in oil and gas, utilities, mining, transport and consumer goods, as well as food, agriculture and other industrials.
The Fasken study points out that companies are adopting a wide range of practices for rewarding chief executives for progress on ESG measures. In at least half the companies that prioritize ESG, the metrics are incorporated with other non-financial goals such as improving customer experience, as opposed to being a standalone incentive.
In addition, such goals are most often tied to short-term pay incentives, including annual bonuses, rather than long-term rewards such as stock options. This, despite the long-term nature of climate-related goals, which often include a series of interim carbon-reduction targets on a path to achieving net zero. Many corporate long-term targets align with the Paris Agreement target of net-zero emissions by 2050.
“It makes sense that you would tie compensation to some of those short-term metrics,” Mr. Raman said. “Companies are doing that because they’re actually paying attention to these things in the short term, they are trying to get traction in the short term.”