ESG, Sustainability & Climate

ESG is a company’s invisible balance sheet. It reflects the expectation from all business partners that the company will behave in a correct and fair way

Climate is part of ESG; but is a very big part. Climate is the biggest business issue for many decades, COVID included.

WHAT IS ESG? ENVIRONMENTAL, SOCIAL, GOVERNANCE

Environmental

Issues connected to the responsible use of natural resources, global warming, energy usage, pollution and the like. 

key factors

  • Climate change risks
  • Carbon emissions
  • Raw materials and water scarcity
  • Pollution and waste
  • Innovation, clean tech, renewable energy

Social

Factors such as how a company treats its workers, health and safety considerations, and community outreach. 

key factors

  • Labour policies/relations and talent management
  • Inclusion and diversity
  • Product liability, including cybersecurity
  • Controversial sourcing
  • Social-Impact reporting

Governance

Topics such as business ethics, board structure and independence, executive compensation policies and accounting practices.

key factors

  • Shareholder rights
  • Pay equity/fairness
  • Business ethics and transparency 
  • Board integration

WHY IS ESG IMPORTANT?

  • Environmental, Social and Governance (ESG) issues are at present a “hot topic”. Is this a “Fad”?
  • Definitions vary. What is meant?
  • Accounting – “goodwill”. Is a business worth more than the assets?
  • Investment  – “quality of earnings”.  Will earnings be sustained?
  • Institutional investors look at ESG as part of the investment criteria.
  • UK companies have a company law duty.
  • UK listed companies have TCFD climate disclosures.
  • ESG – NOT a “nice to have”. It is here; and vitally important.

CLIMATE IS AN EXTINCTION ISSUE

“We are at a unique stage in our history. Never before have we had such an awareness of what we are doing to the planet, and never before have we had the power to do something about that. Surely we all have a responsibility to care for our Blue Planet. The future of humanity and indeed, all life on earth, now depends on us.” 
David Attenborough

 

WHY IS CLIMATE AND ESG SO IMPORTANT?

UK target to cut emissions by 78% by 2035 is world leading – but to hit it action is needed now.

COP 26 – GLASGOW MAYBE EXPECT EVEN MORE

  • ESG is a company’s invisible balance sheet. It reflects the expectation from all business partners that the company will behave in a correct and fair way.
  • By the end of 2020, countries representing 73% of Global GDP had committed to Net Zero Carbon by 2050 (China: 2060).
  • Climate is part of ESG; but is a very big part. Climate is the biggest business issue for many decades, COVID included.
  • The Paris Agreement of 2015 set out the aim of reducing Emissions by 50% by 2030 – only nine years from now. So, the total reduction is strongly front-loaded.
  • Climate, like ESG, has challenges of definition and measurement.
  • Climate is of vital importance to business. This is a strong shareholder view – not woke, populist hubris.

UK COMPANY LAW AND ESG

  • For UK companies, directors have a duty to attend to the long-term view and the wider scene (S172 CA 2006):
    • the likely consequences of any decision in the long term,
    • the interests of the company’s employees,
    • the need to foster the company’s business relationships with suppliers, customers and others,
    • the impact of the company’s operations on the community and the environment,
    • The desirability of the company maintaining a reputation for high standards of business conduct, and
    • the need to act fairly between members of the company.
  • Schedule 7 paragraph 7, requires disclosures on environmental profile.
  • In UK case law, Barings case (2000), each director, and the board overall, have a duty to inform themselves of matters material to the business.
  • As ESG is important to most businesses, particularly climate and non-discrimination.

WAYS TO MANAGE ESG

People Issues – The 7 Cs

managing esg

TCFD DISCLOSURES AND TRANSITION PLAN

  • UK premium listed companies must give “comply or explain” TCFD disclosures.
  • TCFD headings:
    • Governance
    • Strategy
    • Risk management
    • Metrics and targets
  • TCFD has 11 disclosures in all
  • Assess PHYSICAL risk and TRANSITION risk (“Factors” and “Actors“)
  • Expect shareholders to ask about the company to TRANSITION PLAN to net zero-carbon

WHY IS ESG IMPORTANT? TO GET BETTER BUSINESS OUTCOMES

In June 2020, Morningstar found that the majority of 745 European sustainable funds outperformed non-ESG funds over 1, 3, 5 and 10 years

McKinsey identifies five ways that ESG creates value: top-line growth, cost reductions, regulatory / legal interventions, productivity uplift, investment and asset optimisation. 

89% of investors say that the inclusion of sustainability metrics in variable pay is important in both annual and long-term incentives plans

A Harvard study of S&P 500 executives’ pay packages found a positive relationship between explicit incentive compensation for corporate social responsibility and firms’ social performance.

58% of employees consider a company’s social and environmental commitments when deciding where to work

Companies that voluntarily adopt ESG policies are significantly more likely to outperform their counterparts over the long-term, both in terms of stock market and accounting performance. These companies were also more likely to tie executive incentives to sustainability metrics.

92% of consumers will be more likely to trust a company that supports social or environmental issues

CLIMATE AND EXECUTIVE PAY

"Don’t let your company become climate road kill."

Mark Carney
UN Special Envoy for Climate Action and Finance
Former Governor of the Bank of England

Climate as a business issue

TCFD compliance and investors

Climate pay

bec.bostock@corpgro.com

07989 337118

Robert Head

Lead Consultant

Robert works with organisations of all types as a reward consultant or interim reward professional providing reward solutions, interim management and consultancy.

Robert is experienced in working across multiple sectors (including public listed, private equity, commercial, financial, non-profit, and charity).

Robert has deep subject matter reward experience in corporate governance, executive reward, remuneration committees, reward strategy, reward policy, annual bonus, long-term incentives, transformation and change, corporate actions, mergers and acquisitions, and restructuring.

Robert is experienced in stakeholder management working closely with Chairs and executive directors including CEOs and CFOs, non-executive director members of remuneration committees, members of executive committees including business unit CEOs/Presidents, senior HR business partners and other line executives, senior management in other organisations, outside specialists and advisers, and investors.

Robert Head Corpgro

Jane Allen

Lead Consultant

Jane has over 30 years of Reward experience within listed multinational organisations and consultancy environments.

Her expertise covers Total Reward (strategy and programmes), benefits & wellness, pensions, executive compensation, Remuneration Committee support, annual and long-term incentives, VCPs (value creation plans), M&As and restructuring.

Jane has successfully established reward teams and best practices for all key reward processes, leading on complex local and international issues across UK and US listed, family owned, and PE backed ownership structures.

She has a keen interest in ESG and how this can be reflected within Executive Pay to align with the long-term sustainability of businesses. 

Jane is a Fellow of the Pensions Management Institute and a Chartered Insurer. She is an independent Trustee for The Economist Pension Plan.

Damian Carnelll

founder director

CORPGRO is a reward consultancy specialising in executive incentives particularly those connected with growth; and ESG.

Damian has extensive experience advising leading companies on all aspects of executive compensation and equity plans. He was previously with Willis Towers Watson, Aon, and Ernst and Young. 

Damian’s extensive experience in executive compensation and equity plans means he is fully familiar with Corporate Governance norms, institutional shareholder views and proxy voting both advisory and binding.

Damian Carnell Corpgro