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Nov 15, 2023

Exclusive: The ESG and executive pay issue dividing the world’s largest investors

New report reveals money managers’ focus on proxy voting, stewardship and ESG – and what these trends mean for investor relations

Little more than half of the world’s largest investors expect companies to incorporate ESG criteria into their executive pay packages, according to new research seen exclusively by IR Magazine.

Just 34 of the top 65 investors around the world hold a public position on the issue of incorporating ESG metrics into senior compensation – and where they are looking for such links, investors want performance criteria to be material, quantifiable, transparent and sufficiently challenging.

Ali Saribas, AQTION and Squarewell Partners
Ali Saribas, AQTION and Squarewell Partners

As increasing numbers of companies look to align executive pay with ESG metrics, the findings are rather unexpected, Ali Saribas, partner at Squarewell Partners – which published the research through its newly launched AQTION platform – tells IR Magazine.

‘One surprise [from the research] was how split investors are on the topic of integrating ESG criteria in pay,’ he says. ‘The general feel of the market would be that all companies should incorporate such measures into pay plans. The reality, however, is that apart from a few European investors, the push for such measures to be incorporated into incentive plans are not necessarily that clear.

‘There was a lot of language from investors suggesting that, if used, ESG measures would need to be material and clearly defined as to how they would contribute to creating value. For me, that suggests they view these measures as potential ‘free money’ so, if used, they need to be defended.’

The research examines how the world’s largest 65 investors evaluate ESG issues and steward their portfolios. It covers investors with a total of nearly $81 tn in assets under management and includes some of the world’s largest asset managers, sovereign wealth funds (SWFs) and pension funds.  

Increasing transparency

‘Another surprise is the increasing take-up from investors – 25 of the top 65 – to disclose transparently their rationale for votes,’ continues Saribas. ‘Being transparent in expectations as well as voting positions will only help companies improve and strengthen their practices and disclosures to better align with their shareholders.’

Researchers point out that, of this group, Vanguard and BlackRock also publish detailed insights into their voting position in certain ‘high-profile’ situations. ‘These insights are published likely to control the narrative in the media as to how they steward their assets, but also serve as a guide to their position on certain topics for other portfolio companies that may be faced with a similar issue,’ write the report authors.

The majority (58 of 65) publicly disclose a broad voting policy, where the investor communicates its position on a wide range of topics that might come to a vote. Of the eight SWFs included in the research, only Norges Bank Investment Management does this. In 2021, the Norwegian oil fund began publishing voting intentions in advance of company meetings. It is also the only SWF in the research to have endorsed the UN PRI.

Exclusive: The ESG and executive pay issue dividing the world’s largest investors

The G from the E and S

Squarewell has previously called for the governance pillar of ESG to be split out – something AQTION reiterates in the report, where it argues that the growth of ESG has had ‘unintended consequences’.

‘The term ESG has unintentionally led market players to treat environmental, social and governance issues on an equal footing and the current organization of the acronym often leads to the two megatrend environmental and social topics overshadowing governance,’ write the report authors. ‘As the market matures to evaluating companies based on how environmental and social factors are integrated into corporate strategy, we view a similar maturity developing in the separation of governance from the ESG acronym.’

Researchers add that the growth of passive investing, coupled with the proliferation of disclosure frameworks, ESG ratings and research providers, has had the ‘unintended consequence’ of driving companies to view sustainability ‘as a disclosure item’ rather than an issue ‘requiring strategic deliberation’.

They also say the AQTION view is that only active managers are positioned to ‘identify those companies that are governed to communicate an integrated strategy that captures the risks and opportunities presented by global megatrends (decarbonization, digitalization, and so on) to achieve a higher valuation in the market’.

The lesson for IR

The research looks at a range of areas where the world’s largest investors have voiced views – or not. These include the use of external proxy advisers and ESG ratings agencies, what investors want to see around succession planning and the use of disclosure frameworks for human capital, the energy transition and/or biodiversity.

For Saribas, having a deeper understanding of what the investment community wants is key to tailoring your conversations. ‘When engaging with investors, we believe companies should take direct control over this process and always have an objective,’ he says. ‘If you want to seek feedback on a certain sustainability topic, we recommend reaching out only to investors that are known to be knowledgeable on that specific topic.’

Garnet Roach

An award-winning journalist, Garnet Roach joined IR Magazine in October 2012, working on both the editorial and research sides of the publication. Prior to entering the world of investor relations, her freelance career covered a broad range of...