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AllianzGI to vote against companies not linking pay to ESG goals

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Allianz Global Investors (AllianzGI) said it will vote against pay policies of European large-cap companies if they do not include ESG key performance indicators in the executive team’s remuneration packages.

  • AllianzGI is strengthening its voting guidelines with respect to sustainability aspects.
  • Linking executive pay to ESG goals is a sign that a company is taking its sustainability pledges seriously, although it needs to be done in the right way.
  • The move puts further pressure on the corporate world and may be followed by similar initiatives from other investors.

AllianzGI, part of Germany’s Allianz (ETR:ALV), has published its annual analysis of how it voted at AGMs around the globe, based on its participation in 10,205 shareholder meetings and voting in more than 100,000 shareholder and management proposals. It opposed 16% of capital-related proposals, 23% of director-related proposals and 43% of remuneration-related proposals globally.

AllianzGI concerned over remuneration packages

The investor voted against 42.9% of compensation-related resolutions proposed by management. It said that many companies failed to adopt long-term incentives that are truly aligned with the interest of shareholders by rewarding outperformance, not merely market movement.

In light of current economic conditions, in particular high inflation rates in many countries, AllianzGI said it “will carefully evaluate” generous pay packages, taking into account how they relate to pay increases of the wider workforce and consider whether companies underwent significant layoffs, restructuring or cut dividends.

“We generally vote against if we consider pay packages overly generous taking these aspects into account,” said Antje Stobbe, head of stewardship at AllianzGI. “As of 2023, we further strengthen our voting guidelines with respect to sustainability aspects: we expect European large-cap companies to include environmental, social and governance key performance indicators into their remuneration and would vote against pay policies if this is not implemented. We already had a number of conversations on the topic in 2022 with companies where we felt there was a gap.”

Indeed, there were only 52 climate-related proposals from management, though AllianzGI said that it expects high emitters to implement a net zero strategy and share it with their owners. It said that, from 2024, it will vote against the chairperson of the sustainability committee, the strategy committee or the chairperson of the board “of certain high-emitting companies” if the net zero ambitions or the Climate-related Financial Disclosures are deemed dissatisfactory. It expressed concerns over a number of US companies which are often less advanced than their European peers.

What are the benefits of linking ESG performance and executive compensation?

Tying ESG performance and executive compensation can signal that a company is serious in addressing its sustainability goals and is listening to the concerns of its stakeholders. Indeed, the number of S&P 500 companies doing so grew from 66% to 73% in just one year, between 2020 and 2021.

This is being done differently across various organisations. Apple (NASDAQ:APPL), for example, adjusts executives’ bonuses by up to 10% based on performance with respect to ‘Apple Values’, including accessibility, education, environment, D&I, privacy, and supplier responsibility. 

In 2021, Shell (LON: SHEL), which in 2018 became the first oil major to link ESG to pay, increased the weighting of the long-term targets around reducing its net carbon footprint to 20% from 10%. This comes into contrast, however, with a climate lawsuit launched against its very board in February 2023. ClientEarth argued that their failure to approve an energy transition strategy that aligns with the Paris Agreement amounts to a breach of a director’s legal duties. 

The focus needs to be right, however, to ensure that companies are taking the right steps to improve their ESG profile. There are challenges in calculating the goals accurately and there is a risk that some businesses may not set targets that are ambitious enough, and therefore too easy to achieve, or too narrow, ending up with missing the bigger picture. 

There is also a risk of distorting incentives, according to PwC, as research shows that incentivizing pro-social goals can undermine intrinsic motivation. These challenges, however, should not be taken as excuses to not taking action to avoid being wrong.

The market is transforming

At AllianzGI, the achievement of sustainability goals influences the firmwide remuneration pool. A spokesperson said that AllianzGI functions are also embedding sustainability considerations into team and individual goals. For instance, the investment platform has implemented goals that specifically reflect the way sustainability is integrated into the fund and focus areas of each team. 

Other players in the financial sector have announced similar policies, such as AXA Investment Management and Nordea Bank (STO:NDA-SE). AllianzGI’s initiative suggests that there is a transformation in the market, and its stewardship actions may reverberate across the value chain – eventually influencing small- and medium-sized businesses.

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