- 58 of the world’s largest pension and sovereign funds have signed up to investor groups urging ESG-linked pay for portfolio companies…
- … But very few disclose their own remuneration structures for top-flight executives.
- Only six asset owners have publicly added ESG factors into chief executive pay targets.
Asset owners are far less inclined to incorporate ESG factors into executive pay than other financial institutions, according to fresh Capital Monitor research. The findings raise questions on how effective asset owners will be at influencing their portfolio companies, and whether they are treating commitments made on sustainable finance seriously.
Capital Monitor and sister company Global Data analysed the latest published pay practices of the largest 100 asset owners by assets under management, looking specifically at the targets set for their top executives, such as the CEO or CIO, to achieve their maximum bonus payout and whether these considered ESG factors.
These asset owners oversee a combined $18.7trn of assets, with the largest concentration in Asia-Pacific at $6.9trn and second-largest in North America at $4.8trn.
A total of 58 asset owners had signed up to one of the UN Principles for Responsible Investment (UN PRI), Climate Action 100+ and International Corporate Governance Network (ICGN) frameworks. Each of these industry organisations has recommended signatories to push their portfolio companies toward incorporating ESG factors into their executive remuneration.
Asset owner ESG targets
The findings were underwhelming.
ESG-linked remuneration targets were few and far between, with only six asset owners publishing details of ESG-linked targets for variable remuneration. Two institutions were European: Denmark’s Danica Pension and Dutch €576bn ($590bn) retirement fund manager APG. Danica Pension, which manages $69bn of assets, has a target for client satisfaction, and APG said it included sustainability indicators, but no details were given on what these indicators are or how they were assessed.
The main highlights were in Canada – the top seven most transparent asset owners according to Capital Monitor’s calculations were all Canadian pension funds.
Four of them had incorporated ESG factors into their variable remuneration packages, with two incorporating an environmental target. The largest of these was Caisse de dépôt et placement du Québec (CDPQ), one of the largest pension funds in Canada with assets of $328bn. CDPQ included climate change as one of the strategic objectives of its compensation policy.
Specific weightings and assessments for CDPQ’s chief executive were not disclosed, but the CDPQ board did provide a detailed evaluation. With regard to ESG, it said that under CEO Charles Emond’s leadership the fund had “renewed our climate ambition, with the adoption of new targets and distinctive measures that will allow CDPQ to remain a global reference in this area, in addition to benefitting from visibility at major international forums”.
The other asset owner to incorporate environmental targets into its chief executive’s variable pay was Ontario Teachers’ Pension Plan, which manages $186bn of assets. It said in its 2021 annual report that it incorporated climate issues into variable pay targets but disclosed no further information, with no mention of specific key performance indicators (KPIs), targets or environmental factors in the board’s evaluation of the CEO for the previous year.
Lead by ESG example
If asset owners want portfolio companies to align pay with ESG factors, as it appears they do, it’s reasonable to ask if they would have more success if they incorporated some ESG factors into their own remuneration packages. As it stands, far fewer asset owners have adopted ESG-linked pay structures compared with the world’s most influential banks and asset managers.
A quarter of the 100 largest banks have some sort of environmental target, often linked to Scope 1 emissions (direct greenhouse gas emissions), the volume of sustainable finance provided or ESG ratings, while 48 banks had targets that fell into the 'S' and 'G' categories, such as for diversity and client satisfaction.
Meanwhile, 11 asset managers had adopted at least one environmental target, with KPIs linked to the sizes of their ESG funds and stewardship campaigns.
They may need to follow the lead of their Canadian peers in firstly establishing greater transparency on their own executive pay practices, and secondly by incorporating some of the more common targets other financial institutions have adopted, such as those for gender diversity of senior management, and client and employee satisfaction measures.
Climate-related targets can be difficult to adopt as it may not be clear what KPIs to choose from a broad array of corporate sustainability commitments. But it can still be judged in a comprehensive way, as has been done at Goldman Sachs and BlackRock.
No bonus executive pay
There were some asset owners that disclosed that did not offer any variable executive pay. These were Norway’s Government Pension Fund, the China Investment Corporation, Federal Retirement Thrift Investment Board in the US, Saudi Arabia’s SAMA Foreign Holdings and Singapore’s GIC.
Compared with asset managers and banks, asset owners also tended to be less transparent on pay. On Capital Monitor’s transparency index, asset owners scored an average 6.1 out of a maximum score of 100. This was below the 7.7 for asset managers and 36.6 for banks.
The index is based on the availability of a chief executive's (or highest-level investment decision maker's) fixed and variable pay, variable pay targets, weightings of those targets, KPIs of targets, assessment of targets, and detail of evaluation of an executive’s performance provided by the board.
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