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In this 4th session of the 6 webinars, Part II of Climate change: Directors’ Duties and Governance by ASEAN Governance Network Forum, the speakers discussed how good governance practices impact climate change and how executive compensation has an impact on climate performance.
Opening remarks by Dr. Kala Nesadurai, Co-founder of Climate Governance Malaysia, introduced the ASEAN Climate Governance Network, which is a global network of directors of public listed companies who come together with a mission to encourage companies to address climate risks and climate resilience.
Mr. John Philip S Orbeta, the CAO, CHRO, and CRO of AC Energy Corporation moderated the panel discussion with:
Professor Mak Yuen Teen from NUS Business School on the topic of Integrating ESG Factors into Executive Remuneration. Professor Mak shared 10 key questions a company must ask if they want to incorporate ESG into their remuneration policies. Those questions are:
Should the company link ESG Factors to executive remuneration?
· What specific ESG factors should be considered? If the company decides to do it, what will be the factors?
· What specific ESG metrics should be defined relative to each factor?
· Should quantitative or qualitative metrics be used?
· Should ESG metrics be stand-alone, part of an ESG scorecard, or part of an overall scorecard?
· Should ESG performance directly determine remuneration, modify payouts otherwise earned, or be a precondition for payouts?
· How much should ESG metrics be weighted?
· Should ESG metrics be incorporated into short-term incentives (STIs), long- term incentives (LTIs) or both?
· Should ESG performance be measured against pre-set internal targets or external benchmarks?
· How can the remuneration committee balance objectivity and judgment when evaluating ESG performance in determining executive remuneration?
Please find Professor Mak's slides here.
Speaker Dr. Guan Seng Khoo, Vice-Chair of the EU ASEAN Centre at Singapore Economic Forum (SEF) related his topic to the presentation by Prof Mak. The first thing a company needs to consider is to go back to the first principle of ESG. The challenge faced by companies today is the mismatch in maturity between ESG outcomes that may take many years to manifest compared to remuneration, which tends to be shorter terms. The mismatch has to be recognised.
The second thing is linking remuneration and the impact of ESG, which has a lot to do with misunderstanding what the term ESG means as it is a convolution of many nuances and factors within ESG. The board and RC need to decide whether to create ESG metrics based on the 3 dimensions or whether it is better to look at remuneration and bonuses in terms of individual factors. ESG should be written entirely from measurability because some of the themes, like social, are more qualitative than quantitative. While the disclosure is measurement centric, the challenge is the ultimate target, which is to achieve the goal of net zero by 2050.
Datin Norazah Mohamed Razali, Director of PNB, Sime Darby Property, MISC Berhad and Cradle Fund Sdn Bhd gave her point of view from the perspective of the Board of Directors.
Remuneration and compensation are complex exercises and always evolving. When it is overlaid with ESG, especially in the environment, it becomes even more complex. Social and governance are already taken into consideration in business strategy. The environment is relatively new and to bring it down and make it right at the business level is a struggle. It leads to confusion and is a complicated approach to the environment,
Research by YOUGov indicated that only 50 % of companies have a climate target but only less than 30% have data or means to make a baseline and track the progress in terms of climate target.
When a company does target, the company must make assumptions for the short and long term. For example, what technology will be available for the next 5 to 10 years, must assess the technology if it is going to be efficient. It has become a theoretical exercise, but business needs to be practical. These are some of the struggles with materiality assessment that a company must understand about its impact on the business and how you prioritise. To include ESG in the strategy, it has to be done across the organizations, it has to be added throughout the company. The board needs to invest its time in getting the strategy right.
The webinar concluded with closing thoughts from the speakers as follows:
Datin Norazah – It is not easy to get it right. It is important to connect and talk to people about how they have done it, and adapt it to your business through their learning. The awareness is there but needs more conversation on how to implement the agenda.
Dr. Guan Seng Khoo concluded that how to make this practical and measurable still needs to be explored and thought about beyond economics.
Professor Mak suggested the company ensure the board and management have the appropriate competency relevant to ESG. Make sure there is appropriate sustainability governance in place and we have enough resources.