Integrating ESG into executive comp requires creative thinking
- Jan 15, 2021
Canadian tax rules are currently at odds with effectively integrating Environmental, Social, and Corporate Governance (ESG) measures into executive compensation. Creative thinking will be required if these metrics are to be part of Corporate Canada’s pay packages.
ESG measures help investors evaluate companies in which they might invest, and may include environmental impact, working conditions, diversity inclusion, and accounting methods, to name a few.
These challenges were part of a panellist discussion at a livestream event called Integrating Taxation, ESG, and Executive Compensation, co-sponsored by the CPA Ontario Centre for Accounting & the Public Interest and the Chartered Professional Accountants of Ontario (CPA).
Panellists included Dov Begun, Partner, Taxation, at Osler, Hoskin & Harcourt LLP; Christopher Chen, Managing Director of Compensation Governance Partners; and Nadine de Gannes, an Assistant Professor of Managerial Accounting and Control & Sustainability at the Ivey Business School. The panel was moderated by Heather Evans, Executive Director and CEO of the Canadian Tax Foundation.
Here are some highlights of the discussion.
Nadine de Gannes – Adoption of ESG measurement
The percentage of S&P 500 companies reporting on sustainability (which includes ESG) has risen to 90 per cent in 2019, from just 20 per cent in 2011. There has been a call for companies to standardize ESG reporting from the CEOs of Canada’s eight largest pension plan investment managers among others. “That’s significant because market voices will shape how regulations will unfold for us,” she said. de Gannes also indicated that there are global efforts underway to standardize sustainability reporting.
While the International Accounting Standards Board (IASB) might have proposed a climate first approach to sustainability reporting, de Gannes emphasized the importance of also embedding critically important social concerns, such as inequality, into the fabric of ESG reporting and executive compensation metrics in order to solve these pressing issues.
Dov Begun – Executive landscape in Canada
Current tax rules limit the length of deferred compensation plans in an executive’s long-term ESG goals to just three years. There are limited opportunities for deferral beyond that time frame.
While current tax rules provide some guidance in shaping ESG-related executive compensation, there is an opportunity for both government and organizations to think creatively in achieving these objectives through pay. Most tax incentives today are corporate based and in response to such issues as decarbonization or other green initiatives.
“From what I’ve seen there has been less emphasis on looking at it from the perspective of executive compensation,” Begun said. “So, let’s see if we can think creatively to achieve certain ESG objectives by integrating some of these measurable metrics into the compensation programs that impact executives, and really all employees.”
Christopher Chen – Trends in organizations
A 2019 review of ESG metric trends in executive compensation in TSX 200 companies showed that metrics and goals fall into one of five categories: Safety, environment, diversity & inclusion, people & culture and overall sustainability. Chen said, while safety metrics are obviously found in sectors with tangible risks to their employees – such as Energy or Industrials, the softer measures, like people & culture, found in organizations like Communications or Financial Services are harder to measure.
“Remember the old adage: What gets measured gets done,” said Chen. “In the last seven years, we’ve noted a 20-per-cent increase in the inclusion of ESG measures within the TSX. Of those, about half have put some specific weight on ESG in terms of their executive compensation.”