Environmental, Social and Governance (ESG) factors continue their trajectory in becoming critical within the corporate landscape, as large corporations increase their efforts to embed such considerations into their business models. Recently, Apple Inc. announced it will join the growing list of companies that will alter their pay structure to ensure a higher degree of involvement in the ESG space.
How has Apple’s policy changed?
Apple, in its annual proxy filing, highlighted a modification of the executive bonus structure whereby the bonuses would be based on whether the executives act within the company’s six listed social and environmental values. Some of these values include environmental practices like using recycled materials in products, diversity and inclusion among the workforce and the privacy and security of its devices. An ESG modifier based on these values and other key community initiatives will be incorporated into the company’s annual cash incentive program. Furthermore, the compensation committee of its board of directors will use the new modifier to increase or decrease bonus pay-outs by up to 10%. Some of the key initiatives eluded to include entirely removing carbon emissions from the business, including products and the supply chain, by 2030. Apple aim to achieve 75% of this goal by reducing emissions, with the remaining 25% coming from carbon removal or offset projects such as planting trees and restoring habitats. Having said this, not much clarity has been provided on how exactly the evaluation of progress towards these publicly stated targets will be realised.
What led to this change?
This change was triggered by a shareholder proposal suggesting a reduction in named executive officers’ pay ratios as the “ballooning executive compensation is neither responsible for the society nor sustainable for the economy, especially under the current pandemic crisis,” the proposal read. Apple, reluctant to implement such a large change, proffered a recommendation to vote against the shareholder proposal, however, the popularity of the proposal led to the company introducing the modifier to measure how much the executive pay needs to be altered based on the executives’ performances, signalling the start of their modified executive pay structure.
Why is this important?
The inclusion of appropriate ESG issues within executive management goals and incentive schemes is believed to be an important factor in the creation and protection of long-term shareholder value. Carola van Lamoen, senior engagement specialist and pay expert at the Dutch investor, Robeco, approved that linking pay to sustainability was more likely to produce “stable, above-average results” for a firm.
Are we seeing a trend?
There is a clear and increasing trend in the uptake of such policies by corporations around the world; a trend that the former Bank of England governor Mark Carney is also in favour of. He believes that banks should also link executive pay to climate risk management, as part of efforts to align the finance industry with the Paris climate goals. Two Dutch companies – the life sciences group, DSM and the mail business, TNT – will join a growing band of firms that have adopted such policies in the Netherlands, where investor pressure on the executing remuneration has been particularly strong. DSM’s new policy, adopted on the 31st March 2020, will ensure that half of the short-term bonuses for the management board will be linked to targets such as greenhouse gas reductions and energy use, the introduction of environmentally friendly products, and employee satisfaction. Similarly, TNT adopted a policy that gave different weightings to various factors based on the impact each one would have on the overall remuneration each executive could receive. As such, the factors agreed upon were employee engagement as measured in surveys, carbon dioxide efficiency and health and safety objective, and customer satisfaction; each with a weighting of 15%, 15% and 20% respectively.
Room for improvement
The ‘Integrating ESG issues into executive pay’ report by the UN-backed Principles for Responsible Investment (UNPRI) initiative aims to highlight the major opportunities and challenges related to the inclusion of ESG issues within incentive schemes. A key point discussed in the report was that the ESG targets should be stringent and challenging to ensure incentivising outperformance. Another point of guidance was that incentive compensation, especially the rewards for ESG performance, should be subject to claw-back provisions. This means that it should be possible for the compensation committee to claw back the provisions from executives in cases where it later becomes clear that such awards for positive ESG performance were not necessary due to a series of events resulting, ultimately, in the company exhibiting poor ESG performance.
A multinational technology company like Apple announcing such forward-looking policies reflects the growing priority given to ESG considerations by the boards at multinational establishments around the world and acts as a blueprint for other major corporations to follow suit. With important benefits and recommendations highlighted in reports by the likes of UNPRI, this trend is set to develop and spread within the finance industry, bringing ESG considerations into the heart of our economies.