More US corporates focused on ESG performance – Industry roundup: 1 November
by Graham Buck
More US corporates link executive compensation to ESG performance
Most Standard & Poor’s 500 companies are now tying executive compensation to some form of environmental, social and governance (ESG) performance, according to an analysis from US non-profit research group The Conference Board, consultancy Semler Brossy and analytics firm ESGAUGE. In 2021 73% of S&P 500 companies made the link, compared to 66% in 2020.
The most significant increase was found in companies’ use of diversity, equity and inclusion (DEI) goals, rising from 35% in 2020 to 51% in 2021. In addition, an increased focus on climate change saw the share of S&P 500 companies that tied carbon footprint and emission reduction goals to executive pay almost doubled, from 10% in 2020 to 19% in 2021.
Among the other findings from the latest analysis:
- Companies are embracing different approaches to factoring ESG into executive pay and continue to refine their ESG measures as they expand their reach. Some are moving from including ESG measures as part of the often-qualitative individual performance section of the annual incentive plan to incorporating ESG performance as a more quantitative modifier of the company’s overall financial performance rating, which is more aligned with investors’ preferences and expectations. Other companies are expanding the scope of those whose compensation is affected by ESG measures beyond the C-suite, reflecting that achieving ESG goals requires the collective effort of the employee base more widely.
- Companies are incorporating ESG measures into executive compensation, to signal that ESG is a priority, to respond to investor expectations, and to achieve the firm’s ESG commitments. Although valid reasons, they also raise concerns. For example, some large institutional investors are sceptical about tying compensation to ESG measures, especially if the business case for doing so is not convincing and if the ESG goals are not sufficiently challenging or specific. Further, there are other less costly and disruptive ways of signalling ESG is a priority, including building ESG factors into professional development, succession, and promotion practices. Companies can also convey or achieve their commitment to ESG by enhancing disclosure on ESG performance.
- Companies should consider using ESG operating goals for one to two years before including them in compensation. That allows time to see if those goals are truly relevant for the business, develop strong management and employee buy-in, and address any kinks in measurement methodology and reporting. Companies need to take time to validate and socialise ESG goals before rolling them out as part of compensation plans for a broader management or employee base.
- It takes time to develop and compile reliable, meaningful data that can be used to measure and report actual performance against ESG goals. Companies can start by putting together a steering committee with representatives from various functions (e.g., compensation, finance, sustainability) who are engaged in the company’s strategy, and understand and have access to the data needed to measure and report on ESG performance.
- Companies can link executive compensation to ESG successfully; but need to go beyond simply “following the trend.” Actions that companies need to take include:
- identifying goals that are material, durable, and auditable,
- assessing whether what the firm’s peers are doing in this area,
- deciding whether to make performance measures absolute or relative to the market, and quantitative or qualitative,
- determining the scope of those whose compensation is affected by ESG goals,
- considering timing and assessing whether the ESG goal is appropriate for the annual or long-term incentive plan,
- ensuring the type of metric reflects the firm’s corporate culture,
- carefully considering the reaction of various stakeholder groups, and
- re-evaluating goals periodically to ensure the ESG measures remain relevant and effective.
- Companies should explain why including or adjusting ESG goals in compensation programmes makes business sense and will “move the needle” on their performance. Investors will question how modifying the company’s compensation is necessary to achieve its financial, operating, and ESG goals—and whether the goals are sufficiently challenging to put compensation “at risk.” Those covered by the compensation programs will want to understand why a portion of their compensation is now linked to ESG goals. In some cases, the rationale may be obvious, such as when a company includes compliance-related goals in the wake of a widespread compliance failure. In other cases, boards and senior management will want to carefully consider whether they have a compelling narrative for adopting or adjusting such goals, especially as most companies say that including ESG measures in executive compensation is no more than “medium important” to their overall ESG efforts.
- Measuring the full impact of including ESG performance goals in compensation is more challenging than measuring the impact of traditional operating or financial metrics. Companies should consider what they are trying to achieve by including ESG measures in compensation programmes: is it to improve the firm’s ESG performance, to enhance its operating and financial performance, to signal that ESG (or a specific ESG metric) is a priority, to have a meaningful impact on society and the environment, or some combination of all four? If companies intend to have a broader impact on society and the environment, they may want to consider how, if at all, they are incentivizing executives to work collaboratively with others in the industry and across the firm’s value chain—because making a measurable difference may require collective action.
Australia’s central bank not yet done with rate hikes
Australia’s interest rates will continue to rise for the foreseeable future and the Reserve Bank of Australia (RBA) is ready to make higher increases than predicted if the country’s inflation does not begin to ease, says the RBA’s governor, Philip Lowe.
His comments came as the RBA announced the seventh consecutive interest rate hike since May, which saw the cash rate increase by the standard quarter of a percentage point and took rates to a nine-year high of 2.85%. Lowe said the RBA board would not hesitate to move to half percentage point increases if economic conditions didn’t improve.
The coming summer months will be key, Lowe told a dinner in Hobart, where the RBA held its most recent meeting. “The board’s base case remains that interest rates will need to go higher still to bring inflation back to target and our forecasts have been prepared on that basis,” he said.
“We are not on a pre-set path, though. If we need to step up to larger increases again to secure the return of inflation to target, we will do that.
“Similarly, if the situation requires us to hold steady for a while, we will do that. Given the uncertainties regarding the outlook, we will be watching very carefully how the economy and the inflation pressures evolve over the summer.”
Strong dollar “to cut US$10bn from US corporates’ Q3 earnings”
The recent steady rise of the dollar against other currencies is set to wipe more than US$10 billion from US corporate earnings in Q3 2022, analysts estimate.
The dollar’s strength has already been eroding US earnings in previous quarters, sparking concern among investors about its effect on demand. “As an investor you’re trying to get clarity – is what I’m looking at a translation problem or a demand problem?” said Jack Caffrey, a portfolio manager at JPMorgan Asset Management.
The translation problem refers to the way a stronger dollar reduces the relative value of sales made in foreign currencies when they are converted back into dollars for quarterly financial reports. Measured against a group of other developed-market currencies, the dollar rose 17% in the first three quarters 0f 2022, reaching its strongest level in more than 20 years.
Jonathan Golub, head of US equity strategy at Credit Suisse, estimates that for each rise of between 8 percentage points and 10 percentage points in the dollar index, these translation effects remove one percentage point from earnings per share across the Standard & Poor’s (S&P) 500.
With estimated earnings of US$480 billion before the reporting season got underway, the translation effects would cut Q3 profits by about US$10 billion, although some investors estimate the impact could be even higher. Michael Walker, portfolio manager at AllianceBernstein, suggested this year’s move could wipe about 3 per cent from profits across the index for the year.
Many investors are willing to accept such effects if they are confident in the underlying strength of a business. When Microsoft trimmed its Q4 revenue forecasts by about US$500 million in June, for example, its stock briefly fell before rallying to close the day with a gain.
More concerning, however, is the potential for demand to fall as rivals that produce and sell in weaker currencies now look cheaper.
“It’s not something people have talked about enough over the last several years, so there may be an unfortunate period of time where [companies] have to recalibrate what information comes through,” added Caffrey.
In addition to a slightly brighter outlook for the US economy than for Europe, China and others, the dollar’s strength has been encouraged by rapidly rising US interest rates. While the dollar has fallen from its highs in late September as investors have bet on a slowdown in the Federal Reserve’s interest rate increases, a meaningful weakening of the currency is unlikely until the Fed eventually begins cutting rates.
European sovereigns “are coping with poorer liquidity”
Market volatility has hit European sovereigns hard, with government bonds in the region suffering from lower trade volumes in the secondary market and wider bid-offer spreads according to the Official Monetary and Financial Institutions Forum (OMFIF).
OMFIF, a London-based independent forum for central banking, economic policy and public investment last week held its Team Europe borrower’s seminar in Luxembourg at which Tammo Diemer, member of the management board at Deutsche Finanzagentur, the German debt management office, said wider bid-offer spreads and lower trade volumes of German government bonds were “a reflection of the higher volatility’ and a ‘natural reaction of market participants to this situation”.
While there is still “very good demand” for Bunds, Diemer added that ticket sizes were smaller. “We run much more tickets per day than in the past in order to sort of distribute the same amount of funding.”
His views were echoed by other European sovereign Debt Management Office (DMO) heads at the seminar. “This is a very serious issue that we are facing too and I have to say it’s something we look at very carefully because the liquidity on the secondary market for us has always been a crucial driver for a sound funding activity in the primary market,” said Davide Iacovoni, director general of public debt, ministry of economy and finance, Italy.
Iacovoni said volumes of Italian government bonds (BTPs) traded in Q3 of 2022 were in line with volumes traded in Q3 2020, when the coronavirus pandemic was at its height,
BTP bid-offer spreads were also in line with levels during Q2 and Q3 of 2020, said Iacovoni. “However, the situation is not homogeneous across the curve,’ he said. ‘For example, the points of the curve that are covered by future contracts tend to behave better in terms of the bid-ask spread, basically because dealers have these hedging tools that they can use and so these tend to help in this case.”
A longer report on the event can be accessed here.
Nigeria’s ACTN expects currency volatility, higher inflation in 2023
The Association of Corporate Treasurers of Nigeria (ACTN) has told members that the country is likely experience currency volatility, higher inflation, supply chain disruptions and slower economic growth in 2023.
The ACTN’s President and Chairman in Council, Victory Olumuyiwa, spoke at a press briefing ahead of the Association’s Treasury360 Nigeria conference and exhibition themed: “Getting through the uncertainties of supply chain disruption, currency volatility, and inflation” scheduled for 17 November.
She also predicted regulatory changes as Nigeria prepares for the new normal and the forthcoming conference highlighted the important role of corporate treasurers to overcome these challenges and accelerate the pace of change in 2023 and beyond.
“If 2021 was a challenging year for treasurers, requiring adaptability and resilience, 2022 and 2023 will put treasurers to the test on multiple fronts, including currency volatility, rising inflation, supply chain disruptions, slower economic growth, and regulatory changes, all while preparing for the new normal,” Olumuyiwa added.
The Treasury360 conference and exhibition is planned as the first in the series of strategic engagements to deliver on what will become the foundation for growing the relevance of Nigerian business economies with a focus on its global relevance.
Olumuyiwa urged the federal and state governments, as well as government Ministries, Departments, and Agencies, to increase consultation and collaboration with reputable associations in various sectors of the economy, not on global and local issues, but also to reap the enormous benefits of public-private partnerships.
India's central bank begins wholesale CBDC pilot
India’s central bank is scheduled to introduce a pilot wholesale central bank digital currency (CBDC) from today (1 November), and a retail version will start within a month. In a statement, the Reserve Bank of India (RBI) said the use case for the wholesale digital rupee is the “settlement of secondary market transactions in government securities" because it would reduce transaction costs.”
Nine major banks have been selected for participation in the pilot: State Bank of India (SBI), Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC.
The RBI said a pilot of the retail version is expected to launch within a month in select locations in closed user groups comprising customers and merchants. The bank published a 50-page concept note for the introduction of a CBDC in October.
India will have a prominent role in framing global crypto regulation when it takes over the G-20 group presidency for a 12 month period beginning 1 December. The nation's finance minister, Nirmala Sitharaman, has said crypto will be part of the agenda.
Veritas Capital acquires energy consultancy Wood Mackenzie for US$3.1 billion
Scottish consultancy Wood Mackenzie has been sold by data analytics provider Verisk to private equity firm Veritas Capital for a US$3.1 billion cash consideration, payable at closing, plus future additional contingent consideration of up to US$200 million.
The Edinburgh-headquartered consultancy firm has provided data and analytics, predominantly on the energy, renewables and natural resources industry, for nearly 50 years.
Often referred to as WoodMac, the business launched in 1844 as a stockbroker and began researching energy markets during the North Sea oil boom in the 1970s.
In 2015, it was bought by New Jersey-based Verisk for £1.85 billion, during preparation for a stock market listing. A month ago reports began of a potential bidding war between private equity firms including the Carlyle Group, CVC and BC Partners. It followed a campaign by US activist investor DE Shaw, urging Verisk to sell assets and focus more on insurance.
“This transaction best positions Verisk to expand our role as a strategic data, analytics, and technology partner to the global insurance industry, and as a result, drive growth and returns that
will create long-term shareholder value,” said Lee Shavel, Verisk chief executive. “It will also further advance Wood Mackenzie’s competitive position and support the vital roles both organisations play in their respective industries.”
Ecospend to offer “pay-by-bank” services for whisky investment
Ecospend, the UK open banking payment provider, announced a partnership with Whisky Partners. The firm will begin processing customer payments using Ecospend’s account-to-account payment services.
Whisky Partners specialises in UK and European whisky investments. Its service provides a way for customers to invest in whisky casks, as well as providing expert advice on buying and selling whisky for a maximum return on investment.
Ecospend says that its pay-by-bank technology will enable Whisky Partners to receive instant account-to-account payments, significantly reducing the platform’s processing costs. The partnership will also enable a range of new payment functionalities for Whisky Partners’ customers, including:
· A ‘pay-by-bank’ option on their website which will also allow customers to top up their account instantly using Ecospend’s e-commerce payments technology;
· Biometric authentication which will drastically reduce fraud, and provide a payment option without the need to input personal details
The company added that payments will bypass payment processing providers like Visa or Mastercard, resulting in an online payment that is a fraction of the cost of a card payment. Additionally, every transaction is authorised by bank level security for a more secure payment process, reducing the risk of fraud.
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