’Executive pay should be linked to business sustainability’

Managerial remuneration should not solely be based on financial performance of the company, but also be linked to the its performance on environment, sustainability and governance (ESG) parameters, according to CRISIL Ltd. chief operating officer Amish Mehta.

The suggestion to link executive pay to how sustainably a company is run, keeping in mind the need to mitigate its impact on environment and to further social goals such as gender equality and diversity, comes at a time global long term investors such as pension funds and insurers are taking it as a key parameter for their decision making.

Mehta said that this is one area where more needs to be done by boards of directors. “Boards will have to realise the purpose of an organisation is not just profit making. It is also about sustainability. The sustainability element has to figure more and more in board of directors’ strategy discussions,” said Mehta. “Why should managerial remuneration not be linked to sustainability?” said Mehta.

He said that if the leadership team starts looking at ESG as an integral part of a corporation’s forward journey, it will lead to a cultural transformation.

Mehta’s suggestions that businesses have to do more in this regard comes at a time the government has assessed in its sustainable development goals (SDG) index 2020-21 that India needs to cover one third of the remaining distance to achieving its sustainable development goals to be met by 2030.

Crisil said in a report last week analysing publicly available data of 225 companies that ESG considerations are already playing a material role in the decisions of governments, regulators, investors, lenders and corporations. It said in an analysis that IT and financial companies have relatively high overall ESG scores given their inherently lower natural-resource intensity, resulting in lower emissions. On the other hand, oil and gas, chemicals, metals and mining, and cement companies have lower ESG scores, reflecting their high natural-resource intensity and higher emission levels.

Mehta said that not just investors are asking questions about sustainability. Consumers too are becoming conscious of the sustainability track record of businesses in their purchase decisions. If every stakeholder is asking a question holding companies accountable, businesses will have no option but to integrate ESG considerations in decision making, he said. He also said that in a developing country, the shift to a more environmentally conscious way of doing business could only be achieved within a specified time frame given the resources needed to make the transition. “What is needed is a debate so that people ask these important questions,” said Mehta.

According to Crisil, the quantum of investments made based on sustainability considerations has been going up globally. Ten ESG oriented funds in India are managing assets more than ₹10,000 crores as of March 2021, it said.