Cevian calls on boards to end ‘ESG box checking’ and set pay targets

Cevian Capital, Europe’s largest activist investor, has warned that it will punish companies that fail to set environmental, social and governance targets when deciding executive pay, in a move it believes will deter “ESG box checking”.

The intervention from Cevian, which oversees more than €10bn, comes as sustainable investing races up the agenda for asset managers, with the pandemic deepening interest from shareholders, policymakers and other stakeholders in issues from climate change to employee rights.

The Swedish group said on Tuesday that it would use its vote at annual meetings to call out groups that did not include ESG metrics in executive pay packages by 2022.

Cevian’s plans to use its vote at annual meetings marks one of the toughest stances yet taken on executive pay and ESG. The mushrooming interest in ESG has prompted corporate chiefs to become increasingly vocal, including setting net zero targets for emissions.

But Cevian warned that in many cases executives’ interest in ESG was driven by box-ticking and argued long-term “laudable statements” were not supported by shorter-term metrics.

Christer Gardell, Cevian’s managing partner and co-founder, said there needed to be a clear link between a company’s ESG efforts and management pay.

Shareholders, management teams and board directors all look at executive pay “to drive and direct performance”, Gardell said, but only a “tiny share of companies meaningfully incorporate ESG targets into their incentive plans”.

“That makes no sense,” he said. “To get away from ESG box checking and ensure that ESG considerations are truly embedded in corporate strategies, we need to incentivise management teams to embrace them.”

According to ISS ESG, the responsible investment arm of Institutional Shareholder Services, companies are starting to include ESG metrics in executive pay packages.

Its research found that the number of companies globally that included environmental or social metrics when deciding executive pay awards doubled since 2018, with about a fifth of 6,500 businesses examined now considering these factors. According to ISS ESG, companies such as Microsoft included diversity as a metric for executive pay, while others such as BHP included climate change and energy usage.

But Cevian said such metrics were often not tough enough. The activist called on companies to develop ESG targets and incentives over the next year that they consider most relevant for its businesses and stakeholders. It added that businesses should then consult with their shareholders, before putting it to a vote at next year’s annual meeting.

The activist, which is usually among the largest shareholders in the companies in which it invests, said it would vote against the re-election of directors or remuneration plans, as well as advancing shareholder motions on this issue, if businesses did not include ESG metrics in pay.

Cevian currently has investments in about 15 companies, including cement maker CRH, educational publisher Pearson and ABB, the Swiss-Swedish conglomerate, according to S&P CapitalIQ, the data provider.

A survey last year by Edelman found 69 per cent of US investors wanted executive pay to be linked to ESG, up from 2019. Last month Amundi, Europe’s largest asset manager, wrote to companies asking them to include ESG in remuneration plans.

Fidelity International also recently called on companies to include “non-financial and/or stakeholder-focused factors” into their remuneration policies “where sufficiently robust metrics can be identified”. Research from Fidelity last year found that stocks with a good ESG rating outperformed those with a weaker rating in 2020.

Lars Förberg, Cevian managing partner and co-founder, said improving the ESG performance of companies was “not only the right thing to do for society, it is the right thing to do to create sustainable value for shareholders and other stakeholders”.