2012 investor recommendations

Identifying appropriate ESG metrics

Companies should adopt a clear process for identifying appropriate ESG metrics that relate to sustainable shareholder returns and company strategy. In order to do so:

• ESG metrics should have a clear link to the optimisation of shareholder value and be aligned with the long-term business strategy.
• Companies are encouraged to develop their own definition of sustainable value creation and use it to select appropriate ESG metrics.
• Companies should consult with their shareholders in identifying ESG metrics and attempt to achieve a thorough stakeholder mandate to enhance internal and external support.
• Companies should focus on ESG metrics that are generally forward looking, clear, attainable, replicable, comparable and time-bound.
• When selecting key ESG metrics to be tied to compensation, companies should ensure balance, diversity and relevance.

Linking ESG metrics to executive pay

Companies should link appropriate ESG metrics to reward systems in a way that they form a meaningful component of the overall remuneration framework. In order to do so:

• ESG targets should be integrated into an appropriate time horizon that is in line with business strategy.
• ESG targets should be stringent and challenging to ensure incentivising outperformance.
• Companies should select appropriate mechanisms and structures when creating incentive pay packages to ensure long-term shareholder value creation.
• Incentive compensation should be subject to downward discretionary adjustments by the compensation committee to account for unusual events or unintended consequences as well as claw-back provisions.
• In quantifying ESG metrics and measuring performance, the board may apply a clearly substantiated degree of discretion.

Disclosure of company practices 

Companies should endeavour to disclose the rationale, method and challenges presented by the incorporation of ESG metrics into executive pay clearly and concisely. In order to do so:

• There should be clear disclosure of the rationale in identifying ESG metrics linked to executive compensation and evidence of alignment with business strategy and shareholder value.
• Disclosure of metrics and performance targets should be understandable and there should be clear and concise information regarding the structure and mechanisms used in linking ESG metrics to compensation.
• Disclosure should provide sufficient information to allow investors to assess performance against ESG goals.
• Disclosures of relevant ESG goals and their associated links to compensation should be integrated into official pay disclosures.