A Virtuous ESG Circle : From Pay To Workforce To Climate Risk And Finance
The different strands that make up the common concerns we put under one umbrella and call ESG are starting to come together. They constitute the issues of environmental, social or governance importance which affect each and every one of us, because they are fundamentally human concerns. It is the reason why ESG as a trend has done nothing but rise over the last decade as the voices of stakeholders in business and society have been empowered by technology and social media to speak out and be counted.
As humans, we address our concerns via the ethical choices we make, based on the evidence we are given. All the evidence suggests there is increasingly a virtuous circle in decisions to be made around seemingly disparate choices facing our businesses - from climate risk to executive pay.
Heineken, the world’s second largest brewer, recently set targets for carbon neutral production by 2030 and throughout the value chain by 2040. A CNBC interview with Heineken CEO Dolf van den Brink explored the decision. Yesterday, in an interview with Bloomberg TV, Mr van den Brink said executive remuneration for Heineken NV managers may soon depend on how committed they are to fighting climate change.
The company has noticed a “remarkable acceleration” over the past year in how important climate action has become to the company’s stakeholders, Bloomberg noted Mr Van den Brink as saying, and that the CEO believed this would be “key to attracting and retaining future employees.” Heineken is doubtless also keen to move away from the memory of pre-AGM publicity around a €5.5m severance payment to former CEO Jean-Francois von Boxmeer, which the FT notes ignored the Dutch corporate governance code, and was announced in close proximity to news of 8,000 job cuts at the company. While the AGM did not see an investor revolt, Glass Lewis, the influential proxy adviser, had recommended shareholders vote against the remuneration report.
Heineken’s venture into the link between executive pay levels and action on stakeholder concerns goes to the heart of the real power of ESG: the way in which it is being embraced on all levels by global citizens and consumers, particularly among a younger generation.
In the United Kingdom the High Pay Centre (HPC), an independent, non-partisan think-tank historically known for its unrelenting scrutiny of levels of top executive pay, has broadened its focus to look more broadly at the causes and consequences of economic inequality. In a recent briefing, it provided information and ideas on how investors can use the new pay ratio disclosures that appear in UK-listed company annual reports to inform ESG strategies and stewardship. Board Talk recently looked at ESG and executive pay.
HPC is now a decade old, and earlier this week to commemorate #HPCat10, its young director @lukehildyard offered a webinar to explore the relationship between company pay at all levels and company purpose through a corporate culture lens. Amid rising interest in stakeholder capitalism, the scrutiny of pay levels for top management versus those of employees or workers, is not just about retaining a moral perspective on the size of the maximum amount but about taking a holistic look at remuneration and where it sits within strategic purpose.
As we attempt to emerge from the Covid-19 pandemic, it is clear that there should no longer be an assumption that, eventually, life will resume as we knew it. Things will not be the same, because the pandemic will have both exposed and heightened economic inequality, and every single day we are making more discoveries into the ways in which we have eaten away at our ecosystem and our social construct with our choices on economic priorities and social goals.
#HPCat10 explored a powerful tool - workforce engagement - as a way forward to bridge an economic and social divide. In the U.K., the corporate governance watchdog, the Financial Reporting Council (FRC), recently stressed the importance of such engagement for good corporate governance, covered earlier on Board Talk. But when there are signs of a dramatic shift in thinking, it needs to be translated into a shift of what it is we measure, to achieve our goals - we have wrestled with it before but post pandemic can GDP any longer be considered the best measure of well-being ?
In the governance context, what businesses measure dictates their company reporting, which in turn is meant to provide a snapshot for investors to make informed decisions. The U.K has used its world-class corporate governance code as a tool to nudge and cajole business in the direction of better diversity and inclusion. Recent years have seen institutional investors steadily pick up the leadership mantle on stewardship across the ESG spectrum, not only around executive pay but also diversity. Investment in well-being after a pandemic would intuitively seem to be an excellent investment in future productivity - witness the U.K. government’s exploration of flexible working as potentially a ‘default’ option for U.K. businesses.
(Just to add here that I am puzzled as to why this government stance on flexible working, which was evident in March in a government press release mentioning Liz Truss, with further public mention, has only today been discovered by the BBC (as heard on R4Today) and The Guardian. )
Back to investors.
Image credit: JR Korpa @Unsplash
Investors have also played an important role by putting pressure on U.K. businesses to repay pandemic support funds handed out by H.M.Treasury before they handed out big bonuses to management after a better than expected recovery - as this story revealed today, bringing the S and the G in ESG firmly together.
Unsurprisingly, investors were the earliest to pick up on both the threats and the opportunities for business around ESG concerns in their desire to move capital towards sustainable and resilient businesses. I picked up on and covered the trend on a page on Forbes under the leadership banner from 2013 for four years, with a story featuring in 2014.
Since then ESG has become mainstream, greenwashing is rife, and the noise levels are shrill. At a time when prolonged pandemic uncertainty has become the only normal, commercial opportunity in alleviating ESG concerns is both a beacon of hope and a way to regain trust with stakeholders. This much is evident in the announcement this week by PwC of the creation of 100,000 new jobs globally.
Stakeholder voices around social values may have taken longer to be heard over the last decade, but work has been continuing steadily around climate risk and the need to make a sea change around both the measurement of such risk and the allocation of financial capital. The work of the Task Force for Financial Disclosure, or @FSB_TCFD (covered by me in 2016 and also on TCFD website )has formed the basis for organisations to disclose useful climate related financial information. Now that conversation has moved to climate stress tests as a form of measuring what needs to be done, and allocating financial capital wisely.
At a recent ‘Green Swan’ conference for regulators (which I intended to listen into but missed) the world’s top central bankers agreed they had a clear role to play in tackling climate change. Of all the measures available, the most exciting seem to be climate stress tests - as Huw van Steenis, previously a senior adviser to the former Bank of England governor Mark Carney, a key architect in the setting up of the TCFD, explains in the Financial Times today in an opinion piece. Today Mr van Steenis is a senior adviser to the CEO of UBS, and Chair of its Sustainable Finance Committee.
“I suspect that climate stress tests may prove the most powerful tool to nudge the financial system. Over the coming year, a dozen central banks will run climate transition stress tests on banks, insurers and pension funds, following the Bank of England’s lead. They include the European Central Bank as well as authorities in Australia, Canada, Japan and Singapore. These tests could be highly catalytic in repricing the cost of capital between companies. Investors will want to get ahead of these exercises” writes Mr van Steenis.
As the baton is handed to investors, so is stakeholder responsibility for good guardianship of the continuing emphasis and of growth ESG. Stress tests have been “the single most consequential change in financial regulation since the financial crisis“, setting the pace for capital and operational planning as self-protection, writes Mr van Steenis.
We have learnt to measure climate metrics to assess climate risk as a financial risk. Now we need to do the same with the social concerns of ESG, which reflect the disconnect that has grown between societal culture and business decisions around pay and the workforce. Looking at all three together as ESG risk is one way forward.
Main cover image credit: Joey Kyber @Unsplash
