Investors Push Back on Pay Connected to “Soft” ESG Metrics

As companies continue to incorporate ESG goals in their incentive plans, critics of the practice point out concerns with “soft metrics” and lack of transparency resulting in excessive payouts and runaway CEO compensation.

So-called “push back” against ESG goals takes two forms:

• Ideological Disagreement. As noted in the stories below, some conservative investors along with GOP lawmakers are critical of tying ESG goals to pay (and indeed, the entire ESG movement) as being at best “woke” and at worst discriminatory. This is embodied by groups like Stephen Miller and America First Legal, who filed a slew of lawsuits this year at companies disclosing diversity hiring goals.
  
  
• Investor Skepticism. This form of pushback is quite different – in this case, investors who are fully dedicated to ESG disclosure and see sustainability as a key indicator of long-term success are nonetheless skeptical of companies tying those metrics to pay. Investors from As You Sow to State Street have noted they are watching carefully for “greenwashing” or any indication that ESG goals are padding executive pay. This may cause a conundrum for companies whose other investors are requesting ESG metrics be tied to pay, as Alliance Bernstein did.

In an interview with Agenda (subscription only), As You Sow scrutinized the compensation awarded to executives at a large energy company for diversity and environmental goals, complaining that goals were insufficiently rigorous and led to inappropriate payouts. Other groups, like Arjuna Capital, are pushing for companies to substantiate their disclosures and progress towards goals through third-party reviews. 

As You Sow plans to issue guidance to companies later this year with best practices around how to incorporate ESG goals into compensation plans. Measurement through quantifiable data is key and goals should be material to the long-term strategy. Disclosures around how metrics are evaluated and how compensation decisions are reached are also critical to helping investors understand the alignment between ESG goals and pay.