{"id":47102,"date":"2020-11-05T06:20:49","date_gmt":"2020-11-05T11:20:49","guid":{"rendered":"https:\/\/www.riacanada.ca\/?p=47102"},"modified":"2020-11-05T12:07:24","modified_gmt":"2020-11-05T17:07:24","slug":"incorporating-esg-metrics-into-executive-compensation","status":"publish","type":"post","link":"https:\/\/www.riacanada.ca\/wordpress\/magazine\/incorporating-esg-metrics-into-executive-compensation\/","title":{"rendered":"Case Study: Incorporating ESG Metrics into Executive Compensation"},"content":{"rendered":"

Discussions on environmental, social, and governance (\u201cESG\u201d) topics are not new to companies in the energy sector. While oil and gas companies may have previously been considered ESG laggards, this perception has changed over the years; in fact, many oil and gas companies were the first to incorporate ESG metrics in their compensation plans (albeit typically limited to measurable health and safety or operational measures). In December 2018, Royal Dutch Shell PLC (\u201cShell\u201d), the British-Dutch oil and gas company, went a step beyond health and safety compliance when it announced it would incorporate carbon reduction metrics into its executive incentive plan.<\/p>\n

This article examines the process Shell undertook in implementing these metrics, and the role shareholders played throughout.<\/p>\n

Shell’s Carbon Reduction Goals & Executive Compensation Timeline
\n<\/strong>Source: Hugessen Consulting<\/em><\/p>\n

\"\"As illustrated by the timeline, Shell engaged with shareholders throughout the process of establishing carbon goals and incorporating those goals into the executive incentive plans. Although some shareholder resolutions received relatively low support (~5%), they still put the pressure on Shell by emphasizing their focus on ESG.<\/p>\n

The response following Shell\u2019s announcement that it would incorporate ESG metrics into incentive plans was somewhat surprising: ShareAction, a registered charity that promotes responsible investment, recommended voting against Shell\u2019s compensation plan. This recommendation was driven by the fact that Shell\u2019s 10% climate measure is outweighed in the Company\u2019s compensation program by volume growth measures, which are achieved by increased fossil fuel output. While the introduction of a climate measure was a positive signal to shareholders, ShareAction argued that ultimately executives are still incentivized to \u201cchase higher levels of … output\u201d to the detriment of the climate and Shell\u2019s long-term value. While it may initially appear as though the shareholder community was criticizing the very plan it had requested, in fact it was critiquing the effectiveness of the stated metrics. Given the media coverage of Shell\u2019s initial announcement, it is no surprise that shareholders continued to follow the story closely and took this opportunity to signal their expectations to the market.<\/p>\n

Shell\u2019s approach to tying carbon reduction to executive compensation may still be a work in progress, but it has had a trickle-down effect throughout the oil and gas industry:<\/p>\n