The roots and role of ESG-linked remuneration
While many consider performance-linked remuneration as a tool to primarily improve performance, this oversimplification of remuneration targets misses a much broader issue: management risk. Management risk refers to the hazards that arise from ineffective management, which can occur when management’s focus differs from that of the board of a company. This misalignment of objectives can result in management teams, and the broader employee group, becoming distracted from the overall goals and objectives set by the board. Linking pay with performance can help to address this misalignment. It aims to set the employee group’s motivation and focus on the strategic matters that are key to the board and the company’s shareholders through alignment with remuneration.
In the context of environmental, social and governance (ESG) matters, there has been increasing discussion about the role of remuneration incentives in aligning the focus of employees to the values of shareholders. Several studies have strongly demonstrated that ESG-linked remuneration can lead to reduced emissions, improved social license performance, and an increase in company value, which begs the question: why isn’t every company doing it?
It is becoming more common for companies to have strategic approaches to sustainability and ESG management and include non-financial drivers in the values and mission of companies. Yet companies undertaking ESG-linked remuneration remain in the minority. This lag between changing company priorities and its reflection in remuneration packages may be due to the complexity of the ESG space. With a complex array of potential metrics, each with its own potential implications and targets, the sheer breadth of targets can be a barrier in itself. Even with the most common and measurable of ESG targets, such as reduced emissions, understanding what is achievable and how individuals can influence that can be a significant barrier for companies.
Case study in ESG remuneration: Bellevue Gold’s position
Bellevue Gold Limited (Bellevue Gold) discovered the Bellevue Gold Project in 2017. It’s an extension to a historic gold mine that had operated for nearly a century before ceasing production in 1997. Since then, the company has focused on defining the mineral resource and is expecting to move into production during 2023. The corporate environment now, however, is very different to what it was in 1997, with a higher expectation from the public, government, and shareholders to address sustainability issues.
Bellevue Gold embedded this focus on sustainability from the start, releasing its first sustainability report in 2020, and successfully embedding sustainability through the business since. Now, as it moves from development towards production, it is ensuring that ESG continues to be a key part of the business. To do so requires the setting of key ESG targets and linking them to executive and other employee remuneration, including the ambitious target of net zero emissions by 2026.
Net zero emissions: an ‘all of company’ approach
The net zero emissions incentive for executives and other employees is in the form of performance rights. The vesting of these rights is contingent on Bellevue Gold being independently verified and assured by an appropriately qualified assurance provider to have reached the following levels of carbon emissions at the Bellevue Gold Project over a 12-month period post first gold pour, by 1 January 2026:
CO2 equivalent emissions per ounce at the Bellevue Gold Project |
Percentage vesting |
|---|---|
|
> 50% of the most recent annual average CO2e/oz of Australian gold mining companies as reported by S&P Global* |
Nil |
|
< 50% of the most recent annual average CO2e/oz of Australian gold mining companies as reported by S&P Global* but > 0 tCO2e/oz |
Pro rata between 50% and 100% vested |
|
0 tCO2e/oz or negative emissions (i.e. net zero emissions) |
100% vested |
*Or if not available at the time of testing, another reputable external authority
This approach to reducing emissions is to first avoid, then eliminate, reduce, and finally offset the Scope 1 and 2 emissions. As the project is in the development phase it is possible to incorporate the required elements into the mine as it is built. The current strategy is to make the new mine as energy efficient as possible, including:
- A high renewable energy penetration rate in the hybrid power station
- Energy-efficient grinding
- Variable speed drive motors or high-efficiency motors on underground ventilation
- Oversizing the crushing plant to time-shift energy requirements to peak renewable energy generation periods, and
- Optimising power demand management across the mining operation.
Bellevue Gold has also committed to investigating other opportunities to reduce emissions as they become viable. This commitment is demonstrated through Bellevue Gold’s membership of the Electric Mine Consortium, in which over a dozen mining and service companies have joined forces with the ambition to accelerate progress towards a fully electrified zero CO2 and zero diesel particulates mine.
An issues-based approach
Bellevue Gold’s sustainability remuneration approach has succeeded in managing two common issues that arise with ESG remuneration and net zero targets.
Firstly, the incentive is based on clear measurable targets rather than vague provisions. In addition, Bellevue Gold has ensured that their ESG incentives will only be triggered when in production and over a 12-month period. This focus is based on building a wholly sustainable business, not rewarding employees for aspects of the plan. This issue has been well documented within ESG remuneration discussions, and commonly occurs when remuneration schemes are built on limited baseline information.
Secondly, Bellevue Gold has avoided the ‘pay-to-win’ paradox, which occurs when performance schemes allow management teams who could benefit from reducing carbon emissions, to purchase offsets in order to achieve targets, thereby resulting in the company paying twice – for the offsets, and again when the ‘net zero’ is achieved.
Building a strong foundation
As highlighted, ESG-linked remuneration can play a part in achieving significant wins in critical areas such as reduced emissions and improving social license performance. The hurdle for many companies seems to be the complexity of the ESG space, and the balance of developing targets that extend the team while also remaining achievable.
Building a strong foundation to your ESG approach is the key to demystifying the ESG-linked remuneration process and setting appropriate, achievable, and measurable targets. To do this, companies must undertake a robust exercise that includes a materiality assessment and baseline study to develop a clear starting point to plan and measure improvements. Assessing this alongside the company’s appetite and ambition for change will provide guidance on the future direction of the sustainability strategy.
From here, consideration should be given to the common pitfalls that have arisen in ESG-linked remuneration in recent years:
Hitting the target, missing the point |
This can occur when a company sets an environmental target, such as amount of tailings disposal, and meets this goal while having a significant negative impact on the metric in another way, such as heavily polluted tailings. |
Pay-to-win targets |
These are goals that can be achieved through purchased benefits, such as carbon offsets, rather than genuine business improvements. These targets result in a double impact on the company’s bottom line when the company purchases a benefit and subsequently remunerates an employee for purchasing the benefit. |
Business as usual benefits |
This occurs when remuneration targets are set for activities the company is already undertaking, undermining the incentive structure by providing benefits without changing behaviour. |
Unmeasurable, unmanageable |
Vague or generalised targets that are not measurable are unlikely to provide genuine incentive to change employee behaviours and are unlikely to result in companies receiving the intended benefit of the remuneration scheme. |
Serious about sustainability
ESG-linked remuneration presents a great opportunity for businesses to drive change and unlock value-creation opportunities. It also signals to the market and stakeholders that the organisation is serious about taking action but must be approached with the structure and intent to realise these opportunities.
Here to help
Our team of sustainability experts can help your organisation with:
- Materiality assessments
- Measuring carbon emissions
- Setting net zero targets
- Sustainability strategy development
- ESG-linked remuneration strategy.