ESG has climbed up the Australian corporate agenda in recent years, amidst growing stakeholder pressure and increased recognition that an effective ESG strategy is important to the generation of sustainable, long-term value for shareholders.

As a result, we have seen a continued focus on the interaction between ESG and executive remuneration in Australia, with several companies looking to incorporate ‘E’ and ‘S’ measures into their incentive arrangements.

ESG in Executive Remuneration publication guides you through:

  • market practice in Australia around the link between ESG and executive pay amongst ASX listed companies (as compared to countries like the UK and US)
  • views of proxy advisors and investors in Australia on the adoption of ESG measures
  • key considerations for Remuneration Committees and Boards who are looking to adopt these measures
  • guidance on accounting implications of ESG measures
  • sustainability reporting implications on remuneration

Key Australian market practice insights

  • ‘E’ measures are generally incorporated within short-term incentive (STI) plans and mostly found in carbon-intensive industries
  • ‘S’ measures are common across all industries under STI plans, less common under long-term incentive (LTIs) plans
  • ASX companies are less progressed in incorporating ESG measures into incentive plans compared to listed companies in the UK and US
  • Views of proxy advisors differ in respect of ESG measures

Key implementation considerations

  • Is ESG currently part of the company’s overarching strategy
  • Whether the ESG measures should be incorporated into STI or LTI plans
  • The weighting to be given to the ESG measure
  • Communicating why the ESG measure is important to long-term value for shareholders

Key accounting insights

  • Judgment may be involved in classifying ESG measures in share-based payments as non-market performance or non-vesting conditions
  • ESG measures classified as non-market performance conditions allow the expense to be reversed if the ESG measure is not achieved
  • ESG measures classified as non-vesting conditions are incorporated into the fair value of the award and the expense is not reversed if the ESG measure is not achieved
  • Deferral of grant date of a share-based payment can lead to increased volatility in profit and loss
  • Uncertainty of whether ESG measure will be achieved in an employee benefit plan is included in the measurement of the liability

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