In this instructive new stewardship insights piece: “ESG metrics in compensation plans,” prompted at least in part by its observation of the increasing prevalence of ESG metrics in executive compensation plans in the UK and Europe, Vanguard cautions its portfolio companies against the use of ESG pay metrics for the wrong reasons, e.g., in response to external pressures and/or to indicate the company’s commitment to sustainability values. The piece outlines several sound criteria for the use of such metrics that engender Vanguard’s support and provides equally helpful examples of likely unsupportable uses.
Regardless of metric type (i.e., financial or non-financial), Vanguard expects metrics that are “rigorously designed, thoroughly disclosed, and tied to long-term performance goals related to strategic objectives or material risks.” In that the external pressures to include ESG metrics in executive pay are also on the rise in the US, companies and their boards should carefully consider Vanguard’s perspective, which is aimed at promoting long-term shareholder value, before jumping on the ESG metrics bandwagon.