Banner ESG Incentive 1440X520
Close / Return

All Things Green and Fluffy

Self-flattering depictions of corporate greenery are often irksome, but without green dreams – and the right incentives – net zero ambitions may never be realised.

All things green and fluffy look great in any corporate brochure. Never have pictures of wind turbines or luscious pristine forests so often graced the pages of annual reports. If the proverbial Martian only had the world’s library of annual reports as evidence of life on earth, it could only assume that all was well in the Garden of Eden.

Now it is easy to be cynical about this corporate obsession with chlorophyll. “Greenwashing” is the charge laid at the corporate door, with companies’ laundry suspected of being heavily soiled under the repeated green rinses. These corporate brochures may be more dream than reality, but if you don’t dream, you don’t plan; and if you don’t plan, nothing changes.

When a company sets a net zero target it creates a vision, a dream of the future that sets in motion all the plans to get us to that future. Earlier this year we looked at the proportion of companies in our regional portfolios that were dreaming up green visions of the future in the shape of a net zero target. 

As we can see, there are lots of visionaries in Europe, and precious little eco-dreaming going on in Asia. The vast majority of continental European companies had set net zero targets, while around half of those in the UK had done so, with a little less in the US. Only around one quarter of companies in our LF Canlife Asia Pacific Fund had set net zero targets, and most of these were based in Australia and New Zealand. I will fully allow that the pace of change is fast, with companies quickly scrambling to catch up by setting net zero targets, so this data is undoubtedly already out of date. But you get the picture. The denizens of the world are not at one when it comes to worrying about climate change.

Beyond a vision, you need carrots and sticks to get companies trotting meaningfully towards that distant goal of a net zero world. In a series of calls we have held with companies regarding their net zero ambitions, it is interesting to see that when it comes to US companies, the stick is for the moment a pretty thin-looking reed.

When asked whether anything would change for their business if they set no such goal and they carried on with business as usual, a fair bit of head scratching occurs. Mumblings about embracing market opportunities provided by environmentally-aware consumers and the potential to cut costs by reducing energy bills do not suggest that these companies would suffer much if they missed their net zero targets.

In Europe, it is much clearer. For many industries, a lack of action means almost certain de-certification given inexorably rising environmental standards, ballooning carbon credit bills (which will snare ever more industries as years pass) and potential to lose sales to customers who have to prove they are reducing carbon intensively in their supply chains. No action is just not an option.

It is the same story when it comes to the carrot. You can’t even make a meaningful stab at looking at what incentive targets are set for Asian executives, given how coy they are about even disclosing them. But if you move on to the USA you will see that amongst the country’s 30 largest companies Visa, Alphabet, Mastercard and Nike are the only companies to even mention environmental goals in their incentives. Even among this small list, environmental goals are vaguely worded and insignificantly small. For US companies, a decent number of companies have set net zero targets. But in the absence of either sticks or carrots, for the moment the vision of a net zero future looks like, well, just a dream.

Where things do start to get serious is in Europe. UK companies do not do badly, with 50% of its largest 30 companies having set an environmental target, commendably in long-term incentive plans, which are often the juiciest part of any pay package. But top billing goes to continental Europe, where amongst its 30 largest listed companies, not a single one fails to include an environmental target.  This time incentives are almost exclusively focused on the annual bonus, with ESG typically making up around 10-20% of incentives (some outliers dial this up to 30%), and green house gas reduction goals alone topping out at 10% of the maximum annual bonus opportunity.

Though this may still sound modest, it still amounts to a sea-change in a remarkably short time. An article we published just two years ago on the same topic showed that less than 1% of the variable CEO  pay in a decent sample of UK companies was linked to ESG, and even less specifically linked to the environment.

From chlorophyll-filled dreams of a better future, net zero targets are starting to bring changes in management incentives. If management know what to aim for, they may even hit that target.

 

Important information

Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at https://www.canadalifeassetmanagement.co.uk/ 

Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

CLI01961

Expiry 30/09/2022