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ESG performance conditions in employee share schemes

02 November 2021

There has been a sharp rise in the number of companies introducing ESG targets into their rewards and incentive arrangements. Companies need to start considering how introducing ESG based performance conditions via their rewards could not only benefit the environment and the wider community, but also their own financial performance. 

Introduction

COP26, the Paris Agreement and the United Nations Global Impact are highlighting the increasing urgency for action on climate change. The sustainability of the planet has become a priority for governments, companies and individuals across the globe. 

Many companies have Environmental, Social and Governance ("ESG") commitments incorporated into their business strategies and it is now recognised that strong ESG performance is a key contributor to financial performance. 

Linking ESG and remuneration

As ESG increasingly moves to the forefront of the minds of investors, many companies are utilising their existing share schemes and rewards to demonstrate their ESG commitment to investors.
In the last 18 months, there has been a steep increase in companies introducing ESG performance targets for their executives through share schemes and reward. The FTSE 100 2020 year-end report showed that the amount of companies with a performance share plan including an ESG metric had doubled from 15% to 30% in just one year. 

This is done by adding performance conditions into a company's share plan that test performance against the company's ESG targets and then issuing rewards accordingly. In August 2021, the Chancery Lane Report published draft documentation that can be adapted for use in common commercial contracts and transactions to help fight climate change and support the move towards achieving net zero. Included within the free to use legal documentation are climate change performance conditions for employee incentives.

There are many reasons why a company may consider incorporating ESG targets in to its reward and remuneration packages.  We have set out below three key reasons:

Three reasons to consider incorporating ESG into your share plan

1. Reach your net-zero targets earlier

Introducing an ESG metric into a performance share scheme incentivises and rewards executives that are making moves to reduce the company's greenhouse gas emissions. As a result, the scheme could assist companies to reach their net-zero by 2050 target even sooner than predicted, having an incredibly positive impact on the planet.

2. Incentivise your workforce 

By adding ESG metrics into employee share schemes, and in turn setting carefully considered, long and short term ESG targets, the company demonstrates its genuine commitment to the wider community. Seeing their company making these commitments inspires the wider workforce. This can increase employee satisfaction and raise employee productivity, thereby assisting the overall financial performance of the company. 

3. Remain competitive in the corporate market

It is apparent that investors and consumers are prioritising a company's commitment to ESG when deciding who to invest in or purchase goods from. A study from The Times confirmed that 2 out of 3 consumers feel they have a responsibility to purchase products that are good for both the environment and society. 

With ESG commitments currently at the forefront of the minds of investors and consumers, incorporating ESG targets into a share scheme allows a company to remain competitive. Expectations of investors and shareholders only continue to grow, so a company needs to meet these expectations in order to maintain relevance in the corporate market.

Our share scheme team has significant experience advising clients on matters involving the creation and implementation of employment related incentives and share schemes. 

Should you require advice on how to introduce an ESG focused incentive or share scheme or on how to introduce ESG targets into an existing share scheme or reward arrangements, please contact James Cashman or a member of our tax team.

Later this month we will be publishing our ESG research piece which talks about how companies globally are linking ESG performance to Board remuneration, stay tuned for updates!

Article written by James Cashman and Aquiel Brittain-Dissont

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