Bonuses Padded by Cryptic ESG Claims Draw Activist Scrutiny

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(Bloomberg) — As companies increasingly tie executive pay to ESG, there’s evidence to suggest the add-on is being used to enable bigger remuneration packages without leading to any meaningful environmental, social or governance improvement.

In response, activist shareholder groups are demanding more disclosures around ESG-linked pay to force companies to produce transparent metrics. Currently, many of these bonuses are shrouded in vague language, according to US-based nonprofit As You Sow, which focuses on investor issues ranging from climate change to gender inequalities. 

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“We want to know that executives aren’t simply being rewarded, for instance, for climate metrics they’ve already met,” said Danielle Fugere, As You Sow’s president and chief counsel.

The criticism comes as corporate appetite for such remuneration structures is on the rise. Roughly one-third of the 1,000 largest US companies link part of their executive compensation to ESG,  according to Bloomberg Intelligence. The proportion was closer to 15% as recently as 2016.

Chief executive officers “are looking to show shareholders these issues are strategically important,” said Rob Du Boff, a senior analyst at Bloomberg Intelligence in New York. “But they’re more likely to embrace this strategy if they set easy-to-clear thresholds that ultimately lead to higher pay.”

That preference appears to be shaping the pay packages being awarded. Of the US companies tying executive pay to ESG, many have no specific key performance indicators. Additionally, companies tend to avoid the “most material ESG issues,” according to BI.

Companies that are caught awarding ESG bonuses without any measurable ESG improvement increasingly risk being called out. 

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In Denmark, the CEO of pharmaceutical giant Novo Nordisk A/S, Lars Fruergaard Jorgensen, was recently criticized in the local media after he was awarded a bonus this year tied to climate goals despite an overall increase in the company’s CO2 emissions in 2023.

Novo said in a statement that the bonus was paid out because only a portion of Scope 3 emissions — pollution from the company’s supply chains and customers — was included in Fruergaard Jorgensen’s targets.

The majority of the pharmaceutical company’s total emissions come from its suppliers, Novo said, adding that it’s working with suppliers to reduce CO2 emissions.

“If your bonus scheme measures only a small portion of your sustainability targets, and if these targets aren’t very ambitious, then you could potentially mislead others in terms of their assessments,” Andreas Rasche, a professor of business in society at the Copenhagen Business School, said via email. 

There are a few notable examples of people at the top of the corporate ladder not receiving their entire ESG bonus. In 2022, the executive team at Google parent Alphabet Inc. became eligible to receive ESG bonuses for the first time. But of the annual maximum of $2 million offered, only $775,000 was paid out.

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While the tech giant’s compensation committee initially awarded a $1.55 million ESG payout, the company ended up deciding to lower it, citing “macroeconomic conditions.” A spokesperson for the company declined to elaborate on the decision.

Investors are increasingly likely to monitor such developments, according to Friso van der Oord, senior vice president of content at the National Association of Corporate Directors in Arlington, Virginia.

“Investors now believe that these ESG risks pose true investment risks,” he said. “They are material to the long-term performance of a business and therefore, CEOs need to be held accountable for achieving ESG outcomes.”

It’s not enough to farm out all ESG responsibilities to a sustainability officer, said Catherine McKenna, Canada’s former Minister of Environment and Climate Change and founder of the Climate and Nature Solutions advisory firm. 

“You can’t just have the ESG person, or the sustainability person, responsible for trying to achieve goals that are really about how do you transform your business,” she said.

At the same time, BI’s research shows that most ESG-linked pay packages are tied to short-term outcomes, which is where they’re likely to have less clout in motivating executives. 

ESG isn’t “showing up yet” in long-term targets where “the payout is enormous,” van der Oord said.

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