Marked rise in companies recognising importance of ESG

The Investment Association (IA) has published an updated version of its Principles of Remuneration setting out its members' expectations for executive pay for 2023. They reflect developments in market practice and investor expectations, including, notably, linking executive pay to ESG targets.

The IA highlights an increasing trend for companies to incorporate ESG performance metrics into variable executive pay. They say where companies do this, the rationale should be robust and clearly explained to investors, and the ESG metrics should be quantifiable and linked to the company’s strategy. Where companies have incorporated climate-related risks and opportunities into strategies, they say the risks and opportunities should be reflected in remuneration structures and, if that has been planned but not yet started, companies should explain how it will be done in future years.

In his annual letter to remuneration committee chairs, Andrew Ninian, the IA’s Director, of Stewardship and Corporate Governance, says there has been a marked increase in the number of companies recognising the importance of ESG. He talks about their ‘journey’ and the ultimate goal, namely, sustainable long-term financial health. 

So where does HR fit into that, not just in relation to investment but more generally? According to the CIPD’s President, Ruby McGregor-Smith, ESG, in all its guises, ‘should be driven’ by HR. That was her central message speaking at the Festival of Work conference back in June, as People Management reported at the time. She said ‘ESG should be driven by the people function’ and that whilst these issues were all on the board's agendas, the CEOs and CFOs needed ‘a lot of support to get it right’.

Many of our clients are currently on that journey, with HR teams actively involved, so let’s hear more about that. David Bryden has been working with a number of clients on this and earlier he joined me from Edinburgh to discuss it. Given Andrew Ninian’s comments about the increase in the number of firms prioritising ESG, I asked David if he had noticed that: 

David Bryden: “Absolutely, we're getting loads of questions at the moment about what companies can do. In particular, against the background of the cost of living crisis, greenwashing claims, all the issues we're having with droughts in the south of England, lots of companies are looking at what they can do to make their companies more sustainable and, frankly, look better in the press.”

Joe Glavina: “Just thinking about the practical steps HR might take to help on this. What’s the advice around changing policies and procedures?” 

David Bryden: “Clients are looking at some really quite old policies in many cases and thinking, how can I make this fit for the modern world? A lot of people, particularly with trade unions, in their organisations have really old, antiquated, policies and procedures on the books and this is particularly an issue for things like transport and travel where people get particular allowances for particular forms of transport, but it also extends to things like shift patterns, working patterns, benefits, share plans, incentives, a whole raft of areas which, frankly, most of us wouldn't expect to be impacted by climate and the sustainability issues which everyone is now facing.”

Joe Glavina: “ESG is a very broad concept. Is there any particular issue that your clients have been focused on?” 

David Bryden: “There is a lot of media attention on environmental issues - that's the E and ESG for  anyone who doesn't know it. Around the world, companies are facing unexpected challenges in this area. For example, KLM, the Dutch airline, is currently being sued in what's known as a ‘greenwashing claim’ which means that campaigners are saying that their claims about how green and sustainable their company just are not founded in fact. Other companies, which you wouldn't necessarily expect, are facing similar claims. For example, a Hyundai, Innocent, companies who aren't engaged in mass transit and aren't making huge numbers of pollutants you would think. So a lot of our clients are looking at their businesses and seeing what can be done. In France a law was passed last year called, I think, the climate and resilience law, which says that companies have to engage with their works councils on sustainability issues and sustainability issues are very widely drafted. We're talking economic future of the company, we're talking changes to business plans, really broad stuff, and in the UK, we're expecting similar legislation, or at least similar activity. So our advice to clients is engage with your workforces and if you have a trade union start talking to them. There are going to be some big decisions coming down the line in the future and so companies are going to have to look at how they do things, how their policies work, how sustainable things are, and if you start engaging with your workforce, and with your trade unions now, and start tackling the little things, like, what do you incentivize? What goes into your investments? What goes into your incentive schemes, your LTIPs, your share plans? How do you encourage people to travel? Do you fund plane flights instead of trains? Lots of little things. Start talking about these now and then, in the future, you'll be in a much better position to talk about the big things which all of us are going to have to make changes to in order to meet, in particular, the net 2050 target. I know it’s a long way off, but start now and it will be a lot easier.”

Joe Glavina: “Is this relevant to all sectors or just mainly to the energy sectors which tends to get most of the press coverage?”

David Bryden: “It's an excellent question. The energy sector, of course, gets the most coverage because they're in the most polluting area, for most of them but this is a problem that extends to all of us and all of our businesses. We're a law firm, and we're having to think about we're looking at it. We are having to look at where we source our paper. We're looking at where we source our coffee. We're looking at how we invest in things in the company pension scheme. We're looking at how do you travel? We're looking at how do people work? Every company, even when it's not necessarily that obvious, needs to think is my company in a green space and for HR professionals that means is the workforce set up to work in the most sustainable possible manner?”

David and the team has put together a detailed analysis piece which deals with the role HR professionals can play in shaping and delivering their organisations’ ESG strategy, and helping address the skills gap in the process. That’s ‘How HR can shape and deliver the ESG agenda’ – that is currently available from the Out-Law website and we’ve put a link to it in the transcript of this programme. We have also put a link to the Investment Association’s Principles of Remuneration.

LINKS
- Link to Investment Association publishes updated Principles of Remuneration for 2023
- Link to Outlaw article: ‘How HR can shape and deliver the ESG agenda’