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Executive bonuses at two-thirds of FTSE 350 firms linked to ESG performance

Published May 11, 2022

Executive bonuses at two-thirds of FTSE 350 firms linked to ESG performance

Senior executives at an increasing number of FTSE 350 firms must demonstrate improvements in environmental, social and governance (ESG) performance in order to receive their annual bonus for the year, a report has found.

Analysis of the first 50 Directors’ Remuneration Reports published by FTSE 350 companies in 2022 shows that two-thirds link an ESG metric to the award of annual bonus pay or longer-term incentives to executive performance.

In 40% of the reports, the ESG metrics were found in the non-financial operational and strategic metrics or in a personal performance element of the bonus. Only 18% used a discrete ESG element separate from the other performance categories, although this is predicted to increase to at least 30 percent of the sample in 2022.

While there was a wide variety in metrics used, 35% of the companies with ESG in their bonus used ‘ESG strategy development’ (or similar) as a performance metric.

Compiled by Alvarez & Marsal, the report identifies executive remuneration trends in the FTSE 350 by analysing the first 50 Directors’ Remuneration Reports published in 2022 and comparing these with the reports for the prior year. The companies represent around 18% of the FTSE 350.

Many other companies have already passed the stage of ESG strategy development. These are starting to use metrics with quantitative ‘output’ targets. These outputs might be specific to a company’s circumstances; for example, a building company setting targets for the environmental sustainability of the houses it builds. Other ‘outputs’ are shared across sectors, such as greenhouse gas or CO2 emission reduction, water wastage, energy usage and gender diversity targets.

Seyed Ebrahimi, Alfa Energy’s Principal Consultant, Sustainability Strategy commented: “TCFD entails disclosing financial information on the physical and material effects of climate-related risks and opportunities. Such vital information can be used to effectively inform lenders, investors, and greater stakeholders about the potential investment risks they may face. Since the 6th of April 2022, qualifying companies have been mandated to disclose their strategies to manage short, medium, and long-term climate-related risks.  At Alfa Energy, we aim to simplify this process, and using the task force’s outlined specific recommendation, assist clients in disclosing financial information based on four pillars Governance, Strategy, Strategic Planning, Risk Management, and development of metrics and targets. TCFD would complement the greater ESG initiatives and improve a company’s understanding of the financial consequences related to climate change. This will ultimately empower financial markets to better channel investment and develop resilient/sustainable business-financial models.”