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February 04, 2010
Shareowners Are Urged to Press Companies to Link Compensation with ESG Factors
    by Robert Kropp

A Eurosif study of companies listed in the FTSE Eurofirst300 index finds that relatively few European companies link executive compensation to ESG performance, with financial institutions lagging behind all other sectors.

Integration of environmental, social, and governance (ESG) issues into corporate business strategy is recognized by stakeholders as critical to long-term financial stability and value creation. A key factor of such integration is the alignment of executive compensation with consideration of ESG factors. In Europe, the Netherlands, Norway, and Sweden require that shareowners be given a binding vote on corporate remuneration policies. Companies in France, Germany, and the UK are required by law to allow advisory votes.

A report issued last week by the European Social Investment Forum (Eurosif), with research provided by EIRIS, examines the remuneration policies of companies listed in the FTSE Eurofirst300 index. The index includes the 300 largest companies in Europe, ranked by market capitalization.

The Eurosif report report found that 29% of companies in the FTSE Eurofirst300 report some level of commitment to linking remuneration to ESG performance. However, half of those companies fail to clarify which ESG areas are considered, and few companies disclose the proportion of executive remuneration that is linked to ESG performance.

The report identifies financial institutions, which comprise 23% of the FTSE Eurofirst 300 index, as laggards in the adoption of remuneration systems that are linked to ESG performance. Only 16% of financial institutions link executive remuneration to ESG performance, despite last year’s publication by the Financial Stability Board (FSB) of Principles for Sound Compensation Practices.

Stating that “perverse incentives amplified the excessive risk-taking that severely threatened the global financial system” in the financial crisis that began in 2007, the FSB called for official action to ensure that compensation practices in the financial industry are sound. The FSB Principle to which Eurosif specifically refers in its report states that non-financial performance metrics should form a significant part of the performance assessment process.

Asserting that from a responsible investor perspective, the integration of ESG issues is crucial to delivering sustainable companies, and are in the long-term interests of shareholders and society, Eurosif concluded its report with recommendations for shareowners and regulators. Shareowners should engage with companies through dialogue and by voting against unacceptable remuneration packages. Shareowners and regulators should collaborate to encourage legislation of a binding vote on executive compensation.


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