Nearly all Australian companies tie some incentive payouts to ESG metrics. In fact, a greater percentage of Australian companies use ESG metrics than in other developed economies - 81% of companies in the ASX 100 use these measures in executive incentives. This is followed by the UK at 72% (of the FTSE 100) and continental Europe at 66%. The US is bottom of the list of regions studied, at just 56% (of the S&P 100), according to research from Guerdon Associates, an Australian research firm.
A
recent article in IR Magazine took an in-depth look at how that trend has developed. Specifically, it highlighted several contributing factors:
- Australia’s securities and financial services regulators require companies to explicitly consider climate risks.
- Successive occurrences of low shareholder support (less than 75% support) for executive remuneration proposals put the full board at risk the next year (directors in Australia are appointed and subsequently elected for a three-year term).
- The country is highly susceptible to climate change risks.
- A high percentage of extractive industries have highlighted environmental risks, as well as health & safety risks.
- A culture of long-term investing exists, including a large pool of pension investments.
The article notes that ESG has continued to evolve within compensation plans moving beyond safety, compliance, and environmental concerns to include staff engagement, customer loyalty and reputation in the community. Executives will forfeit pay when a company fails in its values including instances of bullying, sexual harassment, or failing to sufficiently improve executive diversity.
In Australia, approximately 30% of overall incentive opportunity is tied to non-financial, ESG-specific results. In comparison, the global median is 20%,
according to Guerdon. While some elements of this trend may be driven by Australia’s unique corporate governance factors, it could offer lessons for US companies.
