By Alan Porter, Fund Manager, Sanlam Investments
Is there a sustainability component to variable remuneration?
Dictionaries define the phrase “put your money where your mouth is” as “to show by your actions and not your words that you support or believe in something”. Therefore, one of the questions on our Sustainability Scorecard for companies is the following: “Is there a sustainability component integrated into variable remuneration?”
Is there a difference in Europe vs US?
Perhaps surprisingly, only 37% of the companies in our portfolio have linked senior executive remuneration to sustainability, despite our holdings having strong sustainability credentials. Even more interesting to us is that only 16% of our U.S. holdings have such a link versus 100% of our European holdings. To be fair European companies are further advanced in their thinking on sustainability largely driven by the expectations of European investors, governments, and regulators but the gap is stark.
Recent engagement with some of our U.S. holdings has highlighted that we should expect to see some real progress here. Some US companies are well advanced in this regard. Trane Technology management’s annual incentive matrix remuneration scheme includes environmental, sustainability and workforce diversity goals in addition to financial targets. Trane have also said that beginning in 2021, all salaried employees will have a sustainability objective aligned with the company’s 2030 sustainability commitments. That is impressive. Eaton have told us that adding a sustainability component to remuneration is under discussion. They are evaluating options and focusing on realistic targets, measurement, and benchmarking. This is good news. IFF in their recent ESG 2030 ‘Do More Good Plan’ say they will launch ESG metrics tied to executive compensation. Again, good news.
What does best in class look like?
So, what does best in class look like? DSM, the Dutch multinational, links 50% of executive short-term incentives to sustainability related goals. These include environmental and people criteria, employee engagement and safety performance. They also link 50% of long-term incentives to energy efficiency improvements and structural greenhouse-gas emissions reduction. This is what best in class looks like.
Why does it matter?
Linking part of executive remuneration to sustainability metrics will mean that company managements will be taken more seriously in their sustainability ambitions. It will show you support and believe in sustainability. We will continue to question managements, particularly in the U.S., on their ambitions here.
Learn more about Sanlam Sustainable Global Dividend Fund
The Fund has holdings which are denominated in currencies other than sterling and may be affected by movements in exchange rates. Consequently the value of an investment may rise or fall in line with the exchange rates.