With sustainable investing becoming increasingly popular, 80 per cent of companies on the ASX 200 now link remuneration to environmental, social and governance (ESG) outcomes.
Kirsty Mackay-Fisher, senior investment analyst at WaveStone Capital, spoke on a recent Fidante podcast to share her research, which investigated how ESG hurdles were woven into the remuneration structures of the ASX 200.
Overall, the WaveStone Capital research team was “generally pleased” to see a high level of ESG adoption in remuneration on the index.
“Our analysis indicated that the vast majority — about 80 per cent of the ASX 200 companies — now link remuneration to some form of ESG,” she explained.
This was up from 73 per cent in 2021, signalling that ESG outcomes were an increasing priority for companies.
“When we break that down by industry, we found that those with a significant environmental footprint and/or social responsibilities had led the way in adopting ESG metrics.”
She urged for ESG targets to be included in a firm’s management remuneration alongside its overall strategic goals.
“The positioning of a firm from an ESG perspective has the potential to impact both its short and long-term profitability and the firm’s valuation,” Mackay-Fisher said.
“The extent to which ESG issues are incorporated in the mix is an indicator of the firm’s likely commitment to sustainable outcomes and the future success of the business.”
However, the majority of ESG performance metrics were tied to the short term. This was despite corporate ESG objectives tending to have a more long-term focus, such as the United Nations’ plan to achieve zero emissions by 2050.
“Of the 159 companies we found to have an ESG metric in remuneration, only 21 firms (13 per cent) included an ESG hurdle in their long-term incentive plan.”
Due to ESG metrics being difficult to measure, this made it harder for firms to observe sustainable outcomes over a long period of time.
Despite this, Mackay-Fisher was optimistic that ASX 200 companies were driving a noticeable change in the broader adoption of ESG criteria.
“Consumers are increasingly looking to ESG alignment in their decisions, as are investors, and this can have an impact on the cost of capital for companies.
“If a company is thinking about its long-term strategic positioning, it needs to bear these ESG factors in mind.”
WaveStone believed that responsibly managed companies were more likely to achieve sustainable competitive advantage and would provide strong, long-term growth.
“Best practice [for firms] should be the provision of targets that are quantifiable, externally verifiable and transparent.”
