ESG bonuses are on the rise: Are they improving sustainability or just increasing executive wealth?

11 10 2023

Two-thirds of companies in Europe and the United Kingdom now include environmental criteria as part of their executive incentive schemes. Image: Shutterstock

By Leanne Keddie, Assistant Professor, Sprott School of Business, Carleton University and Michel Magnan, Professeur et Titulaire de la Chaire de Gouvernance S.A. Jarislowsky, Concordia University via The Conversation • Reposted: October 11, 2023

An increasing number of companies are paying bonuses to executives in the pursuit of sustainability. Driven by an ever-growing focus on global issues, more than three-quarters of large, publicly traded companies in Europe and North America now use environmental, social and corporate governance (ESG) metrics when determining executive bonuses. 

In addition, nearly two-thirds of companies in Europe and the United Kingdom now include environmental criteria as part of their executive incentive schemes.

Typically, annual cash bonuses represent about 24 per cent of a typical CEO’s pay. Since bonus payments depend on the achievement of specific performance goals, their influence on executives’ actions tends to be more immediate. 

While such incentives can enhance a firm’s ESG performance, they also present an opportunity for executives to obtain bigger bonuses under the illusion of “doing good.” There is always a risk of executives manipulating performance metrics to gain bonuses.

Examining ESG incentives

We first noticed that a significant number of executives were being paid bonuses for achieving ESG goals in 2015. By 2020, more than 43 per cent of executives from the largest 500 publicly traded U.S. firms had ESG incentives. 

Since the use of ESG incentives is relatively new, we suspected they might be susceptible to abuse and decided to investigate. Our recent study examines how ESG incentives impact yearly bonuses for top executives.

Since these large companies are required to disclose information on how they pay their top executives, we used novel artificial intelligence to examine these companies’ documents. 

In our analysis, we took into account how much money we expected executives to make, how much power they had over their firm’s board of directors, whether they used ESG incentives or not and whether a variety of corporate governance mechanisms (like sustainability committees) were in place.

The good news and the bad news

Our study found that overall, executives do not appear to be leveraging their power to get higher compensation through ESG incentives. That’s the good news. 

The bad news, however, is that not all executives are wielding their power for good. Some executives seem to use their power to obtain higher bonuses from ESG incentives. This seems to happen particularly in environmentally sensitive industries (mining or oil and gas, for example) or in firms that have other corporate governance mechanisms in place, like sustainability committees. 

It’s possible that tighter oversight is needed in certain industries or even that some corporate governance mechanisms may be more for show than for governance. For instance, board members should ensure they have the requisite knowledge to engage in meaningful conversations about the use of ESG incentives in compensation plans. 

They may also need to put additional checks and balances in place to better monitor, control and advise management on the use of these incentives, especially with respect to the selection of ESG performance metrics.

Why does this matter?

Key stakeholders like the Canadian Coalition for Good Governance, standard setters like the International Sustainability Standards Board and rating agencies such as MSCI advise organizations to include ESG goals in executives’ compensation plans. The objective, presumably, is twofold: to measure what matters and provide executives with incentives to move their organizations toward sustainability.

However, the connection between ESG incentives and sustainability is not so clear-cut. We still need to learn more about the use of ESG incentives to be able to apply them properly. Moreover, firms often equate their ESG focus with sustainability, but the two are not the same. 

A focus on ESG is a focus on how environmental, social and governance factors affect the financial performance of the firm while a focus on sustainability is a focus on how the firm affects society and the environment. Think of it as the difference between a selfie and a landscape photo — one looks inward (ESG) and the other outward (sustainability).

There is limited evidence that awarding bonuses based on ESG criteria automatically translates into improved sustainability for a company. While there is some evidence they might, it’s still too early for a definite answer.

ESG factors focus on risks and opportunities that affect financial performance, not necessarily those that are connected to planetary sustainability. In fact, there is no work to date that we are aware of that connects a firm’s ESG performance to planetary sustainability at all.

While ESG incentives may help a firm mitigate the risk of investors’ or regulators’ intervention, they don’t necessarily translate into sustainability performance. We cannot reiterate this enough: a focus on ESG is a focus on risk and opportunity management, not sustainability.

Our research is a reminder, to boards of directors, executives, regulators and standard-setters, that one-size-fits-all is rarely appropriate and without looking closely at what is happening, these incentives can be abused.

To see the original post, follow this link: https://theconversation.com/esg-bonuses-are-on-the-rise-are-they-improving-sustainability-or-just-increasing-executive-wealth-213034


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New IFRS Sustainability Disclosure Standards — 10 things to know

4 07 2023

The launch of the inaugural IFRS Sustainability Disclosure Standards by the International Sustainability Standards Board (ISSB) means fashion companies are required to communicate the sustainability risks and opportunities they face over the short, medium, and long term. By Hannah Abdulla from Just Style • Reposted: July 4, 2023

The ISSB’s first two standards are IFRS (International Financial Reporting Standards) S1 General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2 Climate-related Disclosures, which will now be released by the end of Q2 2023.

These two standards lay down in practical detail how clothing and textile companies, and those from other sectors, can report how they are impacted by climate change and the environment and how they are preparing to deal with these issues, which can impact their bottom line. Their goal is to help global investors better assess the long-term value of listed companies, with sustainability reports issued alongside standard financial statements.  

Together, these inaugural standards and the ISSB’s capacity-building programme aim to help build trust, confidence and much-needed global comparability to the sustainability disclosure landscape. 

What are the requirements for apparel and footwear brands and retailers? 

Clothing and footwear brands and retailers must disclose their strategic approach to managing environmental and social risks that arise from sourcing priority raw materials.

They are also required, where they use certified fibres and materials, for example GRS, BCI, GOTS, Cradle to Cradle to name a few, to disclose the percentage of the weight of the certified fibres against the percentage of raw material sourced. 

What should fashion businesses know about first set of IFRS standards:

  1. Global disclosure standards: ISSB Standards allow companies and investors to standardise on a single, global baseline of sustainability disclosures for the capital markets, with any additional jurisdictional requirements being built on top of this global baseline. 
  2. International support: The ISSB’s work has received strong support from investors, companies, policy makers, market regulators and others from around the world, including the International Organization of Securities Commissions (IOSCO), the Financial Stability Board, the G20 and the G7 Leaders. 
  3. Disclosure of decision-useful, material information: Focusing exclusively on capital markets means that ISSB Standards only require information that is material, proportionate and decision-useful to investors.  Moreover, by beginning with climate, companies can phase-in their sustainability disclosures.
  4. Building on and consolidating existing initiatives: IFRS S1 and IFRS S2 are built on and consolidate the Task Force on Climate Related Disclosures (TCFD) recommendations, SASB Standards, CDSB Framework, Integrated Reporting Framework and World Economic Forum metrics to streamline sustainability disclosures.  Consolidation will help companies to benefit from their investments they’ve already made in sustainability disclosures while reducing the ‘alphabet soup’ of sustainability disclosures.
  5. Reducing duplicative reporting: The baseline approach provides a way to achieve global comparability for financial markets, and allow jurisdictions to further develop additional requirements if needed to meet public policy or broader stakeholder needs. This approach helps to reduce duplicative reporting for companies subject to multiple jurisdictional requirements. 
  6. Helping companies communicate worldwide cost-effectively: ISSB Standards have been designed to provide reliable information to investors; helping companies to communicate how they identify and manage the sustainability-related risks and opportunities they face over the short, medium and longer term.
  7. Connections with financial statements: The information required by the ISSB Standards is designed to be provided alongside financial statements as part of the same reporting package.  ISSB Standards have been developed to work with any accounting requirements, but they are built on the concepts underpinning IFRS Accounting Standards, already required for use by more than 140 jurisdictions. 
  8. Developed through rigorous consultation: ISSB Standards have been developed using the same inclusive, transparent due process used to develop IFRS Accounting Standards – with more than 1,400 responses to the ISSB’s proposals. All ISSB papers, feedback and technical decision-making are available to view online. 
  9. Interoperability with broader sustainability reporting: The ISSB’s partnership with the Global Reporting Initiative enables the ISSB to build its requirements to be interoperable with GRI standards, helping to reduce the disclosure burden for companies using both ISSB and GRI Standards for reporting. 
  10. A partnership for capacity building: The ISSB’s responsibilities do not stop at standard setting. At COP27, the ISSB announced plans for a capacity building partnership programme, helping to establish the necessary resources for high quality, consistent reporting across developed and emerging economies. 

To see the original post, follow this link: https://www.just-style.com/news/10-things-to-know-about-new-ifrs-sustainability-disclosure-standards/


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Categories : corporate social responsibility, ESG, green marketing, reputation management, social responsibility

International ESG Rulemaker Publishes New Climate and Sustainability Disclosure Rules

4 07 2023

Photo: Greenomy

By Denise Lugo  Editor, Accounting and Compliance Alert from Thomson Reuters • Reposted: July 4, 2023

As expected, the International Sustainability Standards Board (ISSB) on June 26, 2023, issued two new disclosure standards that aim to interweave the climate and sustainability footprint of businesses into financial reporting.

The standards are the first round of environmental, social and governance (ESG)-related disclosure rules to be developed by the board and are being pushed for global use. Both standards are effective for annual reporting periods beginning on or after Jan. 1, 2024. Earlier application is permitted if both are applied at the same time.

“Our language is an accounting language; it is sustainability translated into an accounting language,” ISSB Chair Emmanuel Faber said in a speech at an IFRS Foundation conference that same day. “So you will find in S1, in particular the general requirements, a huge amount of notions that you’re very familiar with on purpose because we want as much as possible that connection within the general purpose financial reporting with the financial statements and with the valuation,” he said. “We are here to support the needs of the primary users of general purpose financial reports in the amount and the decision that they take on providing resources to entities, companies, bankers investors and others. That’s the reason why we exist and for that we know which language they need to be using and we’re focusing on that.”

Under IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2, Climate-Related Disclosures, businesses must disclose all sustainability-related risks and opportunities that could reasonably be expected to affect their cash flows, access to finance or cost of capital over the short, medium or long term that could reasonably be expected to affect prospects.

S2 is specific to climate-related risks to which the entity is exposed, i.e., climate-related physical risks; climate-related transition risks; and climate-related opportunities available to the entity.

The ISSB’s trustees have stressed that the rules are to be viewed as a global baseline for use worldwide.

“The global baseline approach, supported by the G20 and others, will provide investors with globally comparable sustainability-related disclosures that have the potential to move market prices, without constraining jurisdictions from requiring additional disclosures,” IFRS Foundation Trustee Chair Erkki Liikanen said in a statement. “This will help companies and investors by tackling duplicative reporting.”

Upon issuance, the standards pulled strong support from regulatory and other bodies including the AICPA-CIMA, the Financial Stability Board, and International Organization of Securities Commission (IOSCO).

“IOSCO has been actively involved in the IFRS Foundation’s consideration of whether and how to apply its trusted reputation and internationally renowned global standard-setting process to the topic of sustainability disclosures,” IOSCO Chair Jean-Paul Servais said in a statement. “We commend the leadership of the ISSB for the pace and quality of their work. IOSCO is conducting an independent assessment of the ISSB Standards, with a view to completing this review promptly.”

According to the main tenets of the guidance, both S1 and S2 require business entities to disclose information that will enable investors to understand:

  • the governance processes, controls and procedures a business entity uses to monitor, manage and oversee sustainability (S1) and climate-related (S2) risks and opportunities;
  • the entity’s strategy for managing sustainability (S1) and climate-related (S2) risks and opportunities;
  • the processes the entity uses to identify, assess, prioritize and monitor sustainability (S1) and climate-related (S2) risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process; and
  • the entity’s performance in relation to its sustainability (S1) and climate-related (S2) risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation.

This article originally appeared in the June 27, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

To see the original post, follow this link: https://tax.thomsonreuters.com/news/international-esg-rulemaker-publishes-new-climate-and-sustainability-disclosure-rules/


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