Performance Management

Post Meeting Notes: ESG and Non-financial Performance Measures

  • June 1, 2022

This was the third session in PARC’s ‘Performance Trilogy’ examining the broad area of corporate performance and how it should be rewarded. 

  • Our first event focused on how investors and other external bodies define financial performance. The notes from that session are available here.
  • The second explored the use (and abuse) of financial performance measures in annual and longer-term incentive plans. Notes available here.
  • In this session, we turned attention to non-financial performance measures – and in particular, the extent to which Environmental Social and Governance (ESG) criteria should be used to create focus on and reward a company’s social impact and environmental sustainability. These comprehensive notes (which include the content from the previous two sessions) are available here.

The FT has commented: “Today’s corporate zeitgeist looks notably different versus two years ago, never mind a decade back.” As climate change and Carbon Net Zero move up the agenda over the coming decade, the pressure to incorporate non-financial performance measures into incentive plans will only increase.

It is clear that investors need common benchmarks with which to measure companies, to allow employees and customers to rank companies more consistently and judge their protest accordingly. New metrics combined with rising digital transparency will subject companies to a new level of oversight. And yet the focus on reporting may actually be an obstacle to progress – consuming bandwidth, exaggerating gains, and distracting from the very real need for changes in mindsets, regulation, and corporate behaviour. It may lead to risk aversion in allocating capital when innovation is the most important tool to address many of the challenges of climate change and inequality. If done poorly, not only does ESG miss its sustainability goals, but it could also make things worse and let down the very stakeholders it should help.

This event focused on:

  • Whether ESG objectives should link to the long-term vision and strategy of the company – or create focus on more immediate shorter-term milestones – and the balance?
  • How the outturn of ESG objectives affects a company’s strategic objectives and aligns with the KPI’s that are highlighted in the Annual Report?
  • The criteria against which the quality of an ESG objective should be assessed?
  • The extent to which targets should be hard and more easily measured.

To help us gain greater clarity around these issues, the three event speakers provided their views from their different but linked perspectives on ESG:

  • Matthew Roberts, Stewardship Analyst from Fidelity International provided the Institutional Perspective
  • Maureen O’Shea, Management Consultant Partner in Supply Chain and Sustainability at Baringa gave the Business Perspective
  • Prof. Alex Edmans, Professor of Finance at London Business School returned to give the Performance and Reward Perspective

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