- 58 of the world’s largest pension funds and sovereign wealth funds have signed up with investor groups demanding ESG-related compensation for portfolio companies…
- …but very few disclose their own compensation structures for senior executives.
- Only six asset owners have publicly added ESG factors to CEO compensation targets.
Asset owners are far less likely to incorporate ESG factors into executive compensation than other financial institutions, according to news Capital Monitor to research. The findings raise questions about how effectively asset owners will influence their portfolio companies and whether they are serious about commitments made to sustainable finance.
Capital Monitor and sister company Global Data analyzed the latest published compensation practices of the 100 largest asset owners by assets under management, looking specifically at the targets set for their top executives, such as the CEO or CIO, to achieve their payout. maximum bonus and whether these took ESG factors into account.
These asset owners oversee a combined total of $18.7 billion in assets, with the largest concentration in Asia Pacific at $6.9 billion and second in North America at $4.8 billion. .
A total of 58 asset owners had joined one of the United Nations Principles for Responsible Investment (UN PRI), Climate Action 100+ and International Corporate Governance Network (ICGN) frameworks. Each of these sector organizations recommended that signatories encourage their portfolio companies to integrate ESG factors into their executive compensation.
AESG objectives of asset owners
The findings were disappointing.
ESG-related compensation targets were rare, with only six asset owners publishing details of ESG-related targets for variable compensation. Two institutions were European: Danica Pension in Denmark and APG, Dutch pension fund manager of 576 billion euros (590 billion dollars). Danica Pension, which manages $69 billion in assets, has a customer satisfaction target, and APG said it includes sustainability metrics, but no details were given on what those metrics are or how they are. have been assessed.
The main highlights were in Canada – the seven most transparent asset owners according to Capital Monitor’s calculations were for all Canadian pension funds.
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Four of them had integrated ESG factors into their variable compensation packages, two integrating an environmental objective. The largest of these was the Caisse de depot et placement du Quebec (CDPQ), one of the largest pension funds in Canada with assets of $328 billion. The Caisse has included climate change among the strategic objectives of its compensation policy.
The CDPQ CEO’s specific weightings and valuations were not disclosed, but the CDPQ’s board of directors provided a detailed assessment. With regard to ESG, he specifies that under the leadership of CEO Charles Emond, the fund has “renewed our climate ambition, with the adoption of new targets and distinctive measures that will allow the CDPQ to remain a global reference in this area, in addition to benefiting from visibility in major international forums”.
The other asset owner to build environmental goals into its CEO’s variable compensation is the Ontario Teachers’ Pension Plan, which manages $186 billion in assets. It said in its 2021 annual report that it had incorporated climate issues into variable compensation targets, but did not disclose any other information, without mentioning any specific key performance indicators (KPIs), targets or environmental factors in the board’s evaluation of the CEO for the previous year.
Lead by example ESG
If asset owners want portfolio companies to align salaries with ESG factors, as they appear to be doing, it is reasonable to ask whether they would be more successful if they incorporated some ESG factors into their own compensation packages. Today, far fewer asset owners have adopted ESG-related compensation structures than the world’s most influential banks and asset managers.
A quarter of the top 100 banks have some sort of environmental target, often linked to scope 1 emissions (direct greenhouse gas emissions), volume of sustainable finance provided or ESG ratings, while 48 banks had goals that fell into the “S” and “G” categories, such as diversity and customer satisfaction.
Meanwhile, 11 asset managers had adopted at least one environmental objective, with KPIs linked to the size of their ESG funds and their stewardship campaigns.
They may need to follow the example of their Canadian peers by first establishing greater transparency about their own executive compensation practices, and second by incorporating some of the more common objectives that other financial institutions have adopted, such as those for gender diversity in senior management, and measuring customer and employee satisfaction.
Climate-related goals can be difficult to adopt because it may not be clear which KPIs to choose from among a wide range of corporate sustainability commitments. But it can still be judged globally, as has been done at Goldman Sachs and BlackRock.
No bonuses executive compensation
Some asset owners revealed that they don’t offer any variable compensation to executives. These were the Norwegian government’s pension fund, the China Investment Corporation, the Federal Retirement Thrift Investment Board in the United States, Saudi Arabia’s SAMA Foreign Holdings and Singapore’s GIC.
Compared to asset managers and banks, asset owners also tend to be less transparent when it comes to compensation. On Capital Monitor’According to the Transparency Index, asset owners scored an average of 6.1 out of a maximum score of 100. This was lower than the 7.7 for asset managers and 36.6 for banks.
The index is based on the availability of fixed and variable compensation for a CEO (or highest level investment decision maker), variable compensation targets, weightings of those targets, KPIs of the targets , the evaluation of objectives and the details of the performance evaluation of an executive. provided by the council.