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November 21, 2022updated 22 Nov 2022 8:53am

Long read: How the biggest banks are adding ESG into CEO pay

Capital Monitor looks at the extent to which the largest 100 banks by assets are incorporating ESG into CEO bonus targets.

By Chris Papadopoullos

ESG executive pay, Noel Quinn, HSBC
Focused. Group chief executive of HSBC, Noel Quinn presides over one of the most transparent banks when it comes to ESG rexecutive pay. (Photo by Vernon Yuen/NurPhoto via Getty Images)
  • 41 of the top 100 banks considered environmental factors when deciding the CEO’s bonus award, up from 25 last year.
  • Financed emissions targets have been adopted by large international banking groups such as JP Morgan, Citigroup, Barclays and HSBC.
  • Transparency on pay is still limited, with US banks proving slightly more open than European counterparts.

If finance is to play a role in achieving net zero, banks must be the cornerstone of any ESG strategy. They are the main financers of high-emitting industry and are the gateway to global capital markets for corporates.

This report, produced by Capital Monitor using data from sister company GlobalData, looks at the extent to which the largest 100 banks by assets are incorporating ESG factors into the bonus targets of their highest-level decision makers. This can reveal whether banks are incorporating ESG issues into their corporate governance whether they are taking ESG, and their publicly stated commitments around ESG, seriously.

Remuneration targets are also a reflection of a firms’ core targets has come under scrutiny from stakeholders.The Financial Stability Board’s Taskforce for Climate-Related Financial Disclosures (TCFD) underlines the importance of financial institutions’ corporate governance in reporting their climate risks. It recommends that all public companies, where climate-related issues are material, describe whether and how related performance metrics are incorporated into remuneration policies.

This view has been supported by the European Banking Authority which in 2021 issued guidelines for incorporating environmental, social and governance (ESG) factors into remuneration, which took effect from 31 December 2021.

This report is an update on Capital Monitor’s 2021 research bank remuneration and follows similar analysis of asset owner and asset manager remuneration practices. The report is based on data collected mostly from 2022 annual reports and proxy reports.

Key findings

  1. 41 of the top 100 banks considered environmental factors when deciding their chief executive’s bonus award, up from 25 in the 2021 edition of this report.
  2. This increase is predominantly due to an increase in target setting in the US and Canada.
  3. Not only are the more banks with environmental targets, there are more banks with emissions targets; up to eight from two.
  4. Financed emissions targets have been adopted by large international banking groups such as JP Morgan, Citigroup, Barclays and HSBC. More banks are working on establishing financed emissions targets.
  5.  The number of banks with social and governance targets was the same as last years’. Transparency was also little changed, with US banks proving slightly more transparent than European banks, and transparency lacking in Asia Pacific.

Environmental targets

A larger number of banks have adopted bonus targets linked to environmental factors. Capital Monitor research shows that 41 of the 100 largest banks remunerated their chief executive based on environmental (usually emissions) performance, up from the 25 institutions identified in last year’s report.

This was mainly due to an increased number of North American banks, which began turning previous commitments into targets and started providing more detail on their firm’s emissions performance in their annual assessment of their chief executive’s performance.  There were six banks from Canada and five from the US that had newly incorporated bonus targets linked to emissions, or which made climate factors part of the chief executive’s evaluation. Previously, Goldman Sachs was the only North American bank that incorporated ESG performance into its chief executive’s variable pay.

Not only has the number increased, but there has been an increased focus this year on financed emissions. For Barclays chief executive Coimbatore Venkatakrishnan, it was the first year that clients’ emissions were considered in variable remuneration awards. Its remuneration report said directors were on track to achieve its near-term financed emissions target of 15% within its energy portfolio by 2025 and 30% reduction in its power portfolio emissions intensity. To do this, Barclay’s had to introduce its own methodology, called BlueTrack, which measures emissions among energy and power companies.

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Barclays also has a target to facilitate £100bn of green financing by 2030, of which it has completed £62.2bn. Added to these are a Scope 1 and 2 or so-called operational emissions, which includes emission from its own operations. It reduced these by 86% in 2021 compared to 2018.

Citigroup is another big bank which has started looking at financed emissions but is a year behind Barclays. Its CEO, Jane Fraser, was commended by its remuneration committee for introducing a net zero commitment, which over the shorter term includes 2030 targets for its energy and power loan portfolios. The US bank’s 2030 targets include a reduction of 29% absolute emissions for its energy portfolio and a 63% reduction in emissions intensity for its power portfolio.

Citigroup also has a commitment to facilitate $1trn in sustainable finance; $500bn for social categories and $500bn for green categories.

JP Morgan, the largest bank in North America, has set targets for its financed emissions, too. It has set targets for financed emissions in auto manufacturing, electric power and gas. It also has an internal Centre for Carbon Transition, which engages clients on their long-term business strategies and carbon disclosures. This is on top of a target to provide $2.5trn of sustainable finance by 2030, the largest such target of any bank so far. Each of these factors were discussed in the board’s decision on CEO Jamie Dimon’s bonus package.

KBC Group has said it is now carbon neutral in terms of its operational emissions, and has fully phased out direct lending exposure to coal and no longer provides funding or insurance for oil and gas exploration.

The National Bank of Canada has formally started excluding financing of coal and gas extraction. It has set a target of net-zero financed emissions by 2050.

This is in stark contrast to last year’s report, where only two banks were using progress on financed emissions to judge variable remuneration. These were NatWest Group and ING. NatWest Group has successfully measured its financed emissions for 2019, and a target set for 2022 is to produce a climate transition plan based on its financed emissions data. ING’s remuneration target is linked to its Terra initiative, which sets emissions targets for nine high-emitting sectors it lends to.

For ING, variable pay is restricted to 20% of fixed pay by Dutch regulations. This is quite unlike the major US banking groups, where, in the case of JP Morgan for example, Dimon’s variable pay accounted for 96% of his total pay.

Money for saying you will care

Some climate targets were less specific. For example, the chief executive of Goldman Sachs was commended for “leading firmwide and external dialogue on important social topics, such as his championship of the launch of One Million Black Women, the firm’s diversity, equity and inclusion strategy and commitment to sustainable finance and climate transition.” A total of 10 banks referred to ESG targets but did not disclose further details around what such targets were.

Chief executives were also rewarded for incorporating ESG issues into their corporate governance or for setting targets, rather than necessarily achieving them. The chief executive of UBS, Ralph Hamers, was commended for reforming the firm’s management of ESG matters by establishing a group-wide sustainability and impact organisation. CEO’s at CaixaBank and Credit Suisse were also praised by their remuneration committees for ESG-focused changes to corporate governance. Nine chief executives were commended for setting net zero 2050 targets or Scope 1 or 2 emissions targets.

Four banks have CEO targets that depend on their ESG ratings. Japan’s Mitsubishi UFJ Financial Group, for example, has an ESG incentive linked directly to ratings provided by companies such as CDP, MSCI and Sustainalytics, while Italian bank UniCredit has a target that depends on its Sustainalytics rating.

There are several issues with using ESG ratings for this purpose, mostly relating to transparency. In the first instance, it is not clear whether such ratings give any consideration of financed emissions or the institution’s approach to financed emissions. Second, it is not clear what the institution is expected to improve if it wants to improve its ESG rating. For ESG ratings targets to be credible, firms may want to provide more context around what an improved ESG rating means in practice.

Another common target was for the volume of sustainable or green finance debt they lent out. There were 12 banks that linked their chief executives pay to green finance targets. Among the largest targets were JP Morgan and Citigroup, which committed to facilitating $2.5trn and $1trn of sustainable finance by 2030.

Most banks with emissions targets had some form of operational emissions target. This is the emissions generated by their own operations such as energy used in offices and business travel. While most banks supplement their operational emissions targets with other targets such as sustainable finance volumes or financed emissions targets, some banks only have operational emissions targets.

Lloyds Banking Group, for example, is one of the few lenders that only has an operational emissions target. Financial services are generally not emissions intensive businesses. When stakeholders discuss the climate impact of banks, it is mainly the impact, positive or negative, that stems from their lending and capital market activities. An operational emissions target by itself is somewhat irrelevant.

Social and governance targets

For this research we group social and governance remuneration targets together because of their strong overlap. For example, diversity tends to be a social issue, but achieving diversity targets, especially among senior ranks, requires a focus on corporate governance issues. There were 48 banks incorporating social and governance factors into remuneration targets, the same number as last year.

The leading target was for diversity and inclusion. A total of 30 bank chief executives were granted additional variable for hitting targets on diversity and inclusion.  These mostly related to the proportion of senior management positions held by women, but not it was not unusual to see ethnicity included as well as diversity in hiring among more junior staff. This was a higher number last year when 17 chief executives were rewarded to greater diversity achievements.

Meanwhile, 21 banks had targets for customer experience or satisfaction, often linked directly to net promoter scores, which are simple surveys that ask customers or clients if they would recommend a business to a friend.

In some cases, the targets related to the number of complaints or time taken to handle them. Employee satisfaction or employee engagement was a popular target.

There was a greater concentration of social and governance targets in North America, where 13 of the North American banks in the top 100 had a social and governance target. In Europe, 28 of 40 European and only nine out of the 40 in Asia Pacific published one.

Some social and governance targets lacked transparency and Capital Monitor was unable to assess their targets. For example, Groupe BPCE has an all-encompassing corporate and social responsibility (CSR) target that makes up 10% of variable pay. It provides no further detail on what is included in this target. It was a similar case for HDFC Bank.

For banks with ESG targets, it would again make sense for them to say explicitly which sub-indicators of ratings within the social and governance categories the firm has improved on, or which they are targeting when they expect improvement.

There were also banks such as Goldman Sachs, where diversity and inclusion achievements were listed among the chief executive’s, David Solomon’s, achievements, but which did not stipulate the weight attached to these achievements or the extent of the achievement compared with a pre-set target.

ESG pay transparency shows minor improvement

Capital Monitor ranked the transparency of the top 100 banks using an index with six sub-categories. These six categories were the availability of the CEO’s fixed and variable pay, variable pay targets, the key performance indicators (KPIs) associated with these targets, the weight a target was given in terms of its proportion of total variable pay, the assessment of a target (to what extent it was achieved), the level of detail of the board’s evaluation of the CEO’s performance. The points association with each category are shown in the table below.

In Capital Monitor’s opinion, where most banks fall short is in providing detail on environmental bonuses – either by publishing key performance indicators (KPIs) or providing commentary on how the CEO performed against targets and why a certain assessment was given. Such transparency can give insights into how a bank is incorporating ESG ambitions into its operations and governance.

A number of banks have an all-encompassing CSR or ESG target, which incorporates an environmental target but does not separate them out or publish any sub-weightings for them. Some banks, such as BNP Paribas and Goldman Sachs, show that sustainability is considered, but say it is a “holistic” judgement without the reward being linked to quantitative KPIs.

What is important in these cases is that a detailed evaluation from the remuneration committee is given, explaining why it came to the decision it did and what factors, even if qualitative, played a role. This would give shareholders and the public greater insight into how effective the company’s corporate governance is with regards to its environmental ambitions.

Greater transparency is most needed in Asia Pacific. The average transparency score for banks in the region was 18, with 25 out of the 40 banks in the top 100 not disclosing any CEO remuneration data. The average transparency score was highest in North America at 56, while it was 40 in Europe. The three Latin American banks in the top 100, Banco Bradesco, Banco do Brasil and Caixa Economica Federal all scored zero, as did the only Middle Eastern one, Qatar National Bank. Banks remained more transparent on pay than asset managers and asset owners, which was the case across North America, Europe and Asia Pacific.

ESG pay improving, but more needed

The key finding to come out of this year’s analysis of banks’ remuneration practices is the increased focus on financed emissions and formal target setting in the US and Canada.

This mainly reflects the formalisation of these institutions’ former efforts. Before introducing emissions targets, especially emissions targets, a bank first has to attempt to get an idea of its current emissions, which often involves the creation of an internal methodology. It also tends to involve corporate governance changes, with sustainability or ESG issues raised to the board level, sometimes accompanied by the creation of a new dedicated governance committee.

The approach to financed emissions has been to focus efforts on high-polluting sectors such as energy, power and heavy industry. What is also notable is the take up of financed emissions targets among the large, international banking groups such as JPMorgan, Citigroup and Credit Suisse. Some of the most common initiatives these banks were signed up to were the Net Zero Banking Alliance, which is encouraging banks to set intermediate 2030 targets, and the Partnership for Carbon Accounting Financials, which helps financial institutions assess the emissions related to their loans and investments. It is not surprise then, that many of the targets announced by these banks are hard targets for 2030.

Many banks are still undergoing this work, and therefore it is likely that the number of banks that link their chief executive’s bonus payouts to a financed emission target is likely to rise in future editions of this report. The fact that banks have a clear route to setting robust financed emissions targets means there are far more environmental targets set for bank chief executives than those at asset managers or asset owners.

According to Capital Monitor analysis, only two of the top 100 asset owners set an environmental bonus target for the top boss, an only 11 asset managers did. For asset managers, this partly reflects a lack of progress on finding a suitable, measurable target, like banks have found with financed emissions. For asset owners, there is also a difficulty with regard to targets, but also a lack of scrutiny – the majority of asset owners are not listed companies and so do not have to publish documents like proxy reports for shareholders, who can then vote down pay practices they are unhappy with.

Transparency is still low in some areas. There remain some large European banks which are not transparent in their pay practices, but which are making strides in arranging sustainable finance. This includes the likes of BNP Paribas, Deutsche Bank and DZ Bank, each of which referred to ESG or sustainability-related targets, but where no information provided on the targets or publicly available evaluation of the chief executive’s ESG performance.

There does appear to be greater transparency among listed banks, which may be expected as pay practices are subject to scrutiny from shareholders and therefore are more transparent. But it is also in the interest of banks to be transparent on pay. If banks are going to adopt financed emissions targets, or policies that involve influencing clients and expecting them to incorporate ESG into their corporate governance, banks may find they have more weight if they are doing the same.

Transparency overall was little changed from last year. Only six banks had the highest level of transparency based on Capital Monitor’s methodology: NatWest Group, ING, Barclays, HSBC, Société Générale and Westpac. How much CEOs at these banks were paid and why was clearly communicated with breakdowns of targets, KPIs, weightings, assessments and a detailed evaluation of the CEO explaining the assessments. If there is a lack of transparency around a target, how much a target is worth, or whether it has been achieved, then it is not clear to stakeholders what that variable incentive means in practice and whether it is having any impact.

Where transparency needs the most improvement is in the Asia-Pacific region, where disclosure on CEO pay is broadly opaque. In North America, while banks are more transparent, the fact that environmental targets have yet to make their way into CEO remuneration may be a sign that climate-related issues have some way to go before being incorporated fully into banks’ corporate governance.

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