Innovations in Sustainable Finance #6: ESG Incentives and the Zone of Discretion with Tom Gosling

Innovations in Sustainable Finance

Did you know that most large European corporations compensate executives for reaching ESG targets? Is that a good thing, and how should this be done?

I discuss these fascinating questions with Tom Gosling, perhaps the world's most experienced expert regarding ESG compensation. I learned a lot in this episode! Some (but not all) of my favorite insights:

1. Even if ESG targets contribute to long-term shareholder value, it can make sense to incentivize middle managers on ESG because they are usually incentivized on annual targets.
2. ESG incentives can work when they are aligned with overall strategy, focus on one central ESG issue, and are monitored by a knowledgeable anchor investor
3. There is no way to fix the economic incentives given by the market and regulation with managerial incentives.

Tom has written about this topic a lot, as you can see on his homepage. Here are some direct links to documents mentioned during the podcast:

Paying for net zero assesses the quality of climate targets in large European companies. Spoiler alert: it’s not great.

Paying well by paying for good is a report produced in collaboration with PwC looking at whether executive pay should be linked to ESG targets, and if so how. The follow-up paper Paying for good for all looks at practice and attitudes globally and extends the analysis to consider alignment of broader company-wide reward strategy with ESG.

Executive Pay and ESG Performance is an excellent summary of the first report in blog format.

And here two of the recent papers that Tom mentions:

Say on ESG: The Adoption of Say-on-Pay Laws, ESG Contracting, and Firm ESG Performance

Executive Compensation Tied to ESG Performance: International Evidence