Three-quarters of top 20 companies on the Irish stock market are now linking executive bonuses in some way to environment, social and governance (ESG) targets, as international investors increasingly demand that publicly-quoted groups adopt these non-financial goals as part of remuneration packages.
The move, from an almost standstill position two years ago, has been accelerated in the latest slew of annual reports in recent months, as companies prepare to hold in-person annual general meetings (agms) for the first time since the onset of the Covid-19 pandemic. Still, executive variable pay in Ireland and elsewhere remains mainly tied to financial measures such as earnings, return on equity for shareholders and cash flows.
Building materials giant CRH, whose chief executive Albert Manifold received an Iseq-record remuneration of €13.9 million last year, said in its annual report that it is proposing that 15 per cent of awards under its executive performance share programme for 2022 be tied to ESG targets. These include measures on driving the company towards carbon neutrality, inclusion and diversity and revenue from products "with enhanced sustainable attributes".
Paddy Power owner Flutter said it included "extremely challenging" safer gambling targets for two of its four divisions in its management bonus plans last year and will widen these out to all divisions in 2022. The company is also "actively considering" using remuneration to "support and incentivise our wider ESG agenda".
A fifth of Kerry Group’s executive long-term incentive plan since last year was tied to the company achieving milestones against its targets of reducing carbon emissions by 55 per cent and food waste by 50 per cent by the end of the decade.
Housebuilder Cairn Homes, which introduced a long-term incentive plan (LTIP) for chief executive Michael Stanley last year after a previous "founder shares" incentive scheme proved less lucrative than envisaged at the time of the group's 2015 flotation, tied a fifth of its short-term bonus plan and a fifth of its LTIP to ESG issues.
Some companies, including Ryanair, as of its most recent annual report to March 2021, and ferries operator Irish Continental Group, have not given a breakdown of ESG weightings in variable pay plans, even as their reports contain reams on environmental targets.
Bank bonuses
The State's banks remain subject to an effective ban on bonuses since the outset of the financial crisis. Bank of Ireland, which is at the forefront of lobbying for a return of variable pay, said in its latest report that the prohibition means that the group "clearly cannot link group culture and values, risk culture, ESG objectives, customer outcomes and executive performance to remuneration".
European companies are ahead of US peers in terms of climate-related financial disclosures.
A quarter of US companies included some form of ESG metric as part of their executive incentives last year, according to Glass Lewis, a proxy advisory company that makes recommendations to institutional investors on corporate governance matters and agm votes.
Carlo Funk, the head of ESG investment strategy for Europe, Middle East and Africa at global investment management giant State Street Global Advisors, said the success of companies putting ESG metrics in remuneration comes down to disclosures over key performance indicators (KPIs)
“Companies need to define the right KPIs. If they don’t do this, it’s actually meaningless,” Mr Funk told The Irish Times. “There also needs to be an establishment of KPIs that are globally agreed upon.”
He said the work of the International Sustainability Standards Board, which was founded late last year and aims to set disclosure standards that will allow for reliable and comparable reporting by companies on ESG matters, would be "super important" for investors.
