Weekly Dose of ESG — Stakes over Stocks?
Stakes over Stocks?
Friday, 18th February 2022
What is going on?
Last week, Salesforce became the latest large company to announce that the compensation of their executives will be tied to ESG performance. It follows in the steps of the likes of Apple and McDonald’s, which all tied at least some of the variable compensation to some ESG measures in 2021. For example, Salesforce executives must focus on reducing air travel emissions while at McDonald’s one of the focuses is on diversity and inclusion.
This is a very interesting development. Over decades, the main objective for executives was to maximise shareholder value. Of course, this could lead to decisions out of line with the three ESG pillars. Despite that, many successful companies were founded and built into global players with many well-paid CEOs: the median compensation for CEOs of S&P500 companies was above $12mn in 2019. By the way, one of the sectors with above-median pay is still the energy sector.
So, does it make sense for companies, and executives, to move to a more stakeholder centric approach?
What does the data tell us?
While this question becomes ever more relevant given various announcements of companies in recent years, at Arabesque we have looked at this issue before. In 2015 we published the report “From the Stockholder to the Stakeholder” in cooperation with the University of Oxford.
This meta-study of over 200 academic papers and other reports resulted in a few strong arguments for a change towards stakeholder capitalism. For example, 90% of the studies on cost of capital showed that implementing good sustainability standards lowers the cost of capital for companies. 88% of the research indicated that considering ESG leads to better operational performance.
And lastly, a bigger focus on ESG leads to better stock price performance. Two weeks ago, we wrote about this exact topic and asked ourselves if the outperformance will persist. For various reasons we concluded in: Yes, it will. Moving from stockholder to stakeholder capitalism is just one more reason.
What is the takeaway?
In September 2020, nearly 70% of over 600 institutional investors managing over $70trn stated in a survey that they want executive compensation linked to ESG measures. While a few big names publicly announced their slow transition to a more stakeholder-centric compensation approach, there are still many companies that don’t have such policies in place. This development seems to be somewhat regional as well, as PwC estimated as many as 75% of FTSE 100 companies will have ESG measures in place for compensation while in the Fortune 100, 62 companies do not.
We are certain that the numbers will rise and the importance of ESG aspects for compensation will increase over time. To speed things up, we as investors and shareholders can do our part and use our voting power to spark some changes in portfolio companies, regardless of the topic we want to nudge.
See you next week!
Paula & Philipp
