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ESG targets - casting the net wider than the financials to set executive pay

The Investment Association (IA) represents a large number of UK investors, and has issued a timely reminder that investors will expect companies to exercise continued restraint on executive remuneration and bonuses, and apply ESG considerations where appropriate, as the economy eases its way out of the global pandemic. Heading towards the 2022 reporting season, the IA Guidelines and Principles, updated earlier this month, are a reminder for listed companies that, just as ESG considerations should increasingly underpin strategy, they should also be a factor in the metrics for deciding on executive pay and bonuses.

So, how should companies respond? This will depend largely on the size and nature of the company, and how far it has travelled along its ESG journey. If a company has already incorporated the management of material ESG risks and opportunities into its long term strategy, this should also feed through to performance conditions for its variable remuneration. ESG metrics should be quantifiable and there should be a transparent link to the company's strategy. For example, the "governance" element of ESG might involve performance targets being linked to greater diversity at board level. Full disclosure should be made to investors of the rationale behind the selected ESG metrics and targets.

Likewise, there is full recognition by the IA that many companies may not yet be in a position to do this. If they have not yet incorporated ESG metrics into their remuneration structures, the IA points out in its letter to Remuneration Committee chairs that they should simply be open and transparent with shareholders as to the approach they plan to take in future years.

Crucially, shareholders have the opportunity to vote on a company pay policy. That’s why every year the Investment Association sets out its principles of remuneration — essentially, the best practice investors expect to see when it comes to executive pay and bonuses. This year, our principles build on our approach from the past few years, focusing on: continued restraint in light of the pandemic and how best to incorporate environmental, social and governance (ESG) metrics into pay structures.

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corporate, employment, sustainability and esg

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