Leann:  So welcome to our next episode of Mobility via Podcast, KPMG’s podcast series covering a range of mobility topics from remote work to international and domestic business travel and rewards just to name a few.  Hello, I’m Leann Balbona, managing director from our Global Reward Services practice and joining me today is Parmjit Sandhu, a principal in our rewards practice. 

We recently spoke on our TaxWatch webcast featuring the KPMG Board Leadership Center and Seyfarth Shaw on a very important topic, ESG, human capital management and the public markets’ impact on compensation and rewards.  We had over 900 participants join this webcast so this topic is of high interest. Parmjit, what were some of the takeaways from this webcast that you’d like to share with us? 

Parmjit: Thanks again.  So we covered several interesting areas in the ESG space, from defining ESG to the boardroom view, the recent human capital management disclosure and generally how companies are thinking about tying rewards to ESG initiatives.  And it’s telling that ESG is one of the top agenda items within companies, their boards, and from investors.  And what we heard was pretty much every committee within an organization has ESG on their agenda.  And this actually prompted some of them to create new roles or committees to oversee and streamline ESG within the organization.

The other key takeaway is that the list of stakeholders has grown.  So historically, it was shareholders that were focused on this, but now it’s not only investors, but also employees, there’s consumers, there’s vendors and also the general public.  They’ve all become stakeholders.  And I think everybody is agreed on one aspect, which is companies should profit responsibility. 

Leann: During the webcast, Parmjit, we asked the audience a few questions and I thought it was very interesting where companies are on this ESG journey.  We asked them a question of where would you say your company is on this journey and we referenced a white paper that KPMG published, “ESG Journey, Lessons from the Boardroom and C-Suite”.  Any thoughts here?

Parmjit: Yes, so it’s interesting how companies responded.  About 35 percent of them said they didn’t know at this point, but the rest of the 65 percent or so, were spread across … we’re in the early stages, we’re level setting, or we’re assessing, we’re determining which ESG strategies and opportunities are relevant for the company.  There was a few around sort of the eight percent mark that were actually at stakeholder communications stage.  So they had determined what their ESG messages were and they were being delivered to investors.  And then finally, only about six-and-a-half percent were at the board oversight stage, so that’s where they were ensuring that the board has the right composition, the structure and the process to oversee ESG.

So I would say, based on our respondents, most companies either haven’t started the journey yet, or if they’ve started it, they’re in early stages.  Very few companies are at the point where they’re actually implementing and considering it at the board level.

Leann: For our session, we pulled a sample set of data from 32 companies, 10-Ks, proxies and human capital management disclosures.  And it was interesting to see that all of the companies focused on ESG in some form, but it was interesting to see how the focus shifted by industry, whether it was on the E, the S or the G, really varied.  And while there was some common themes, the poll from the webcast indicated to us that really the top priority for company was the human capital management, talent management, diversity and inclusion and pay equity piece of the social, the S in ESG, whereas environmental was coming in next and then health and strategy and resource focused.  And there was 23 percent that didn’t know.  And I think that 23 percent that didn’t know, I don’t think this is really unusual, as there are companies, you know, still defining their ESG strategy. 

Parmjit: Yes, and I think that audience poll basically aligned with the survey that we did.  So we had polled about … well, we didn’t poll, we reviewed publicly available information from about 32 companies, where they had summarized human capital.  But it was interesting because the most common factor that was identified was inclusion and diversity.  It seems to be an area of focus across many companies and that’s regardless of industry, environmental came in next, and then health and safety which was obviously prevalent because of the pandemic.

Leann:  And when we look at the ESG area focus and rewards, we also asked our audience if they had determined what to measure from an ESG perspective to consider for rewards.  And our audience told us that about 13 percent have determined what to measure, but 20 percent were working on what to measure.  And nine percent said that they were still looking at this over the next 12 to 18 months.  There were 19 percent that were not thinking to tie ESG to rewards, and then a 38 percent number that didn’t really know yet.  So I think this just tells us that this area is still developing for companies as they look to define strategy, define measures to then tie it to reward.

Parmjit: Leann, I think it’s clear that there’s definitely a connection between a company’s human capital strategy, the human capital disclosure requirements that have recently been introduced, what ESG metrics each company is looking at, how they pay people through rewards and then ultimately, all of this actually drives the ESG rating.  And I think that was the message we were focused on getting across on the April 22nd webcast, which is that all of these factors tie together and they tie to drive the ESG rating.  Because anybody who is an investor or a shareholder will be reading public disclosures and the quality of that disclosure will really drive what the ESG rating might ultimately be.

So, similarly with this approach, we ask the audience how they are tying ESG ambitions to rewards, and what we came back with was interesting.  About 40 percent of companies don’t do anything in terms of tying reward to ESG ambitions.  Interestingly, about nine percent of companies tied ESG to short term incentives, like annual bonuses, and about 11 percent tied them to both short term and long term incentives.  And there was about 26 percent that said that they don’t tie anything to ESG at the moment. But the important piece was that about nine percent of companies said that they plan to tie ESG to rewards in the next 12 to 18 months.  So I think there’s definitely a shift here towards tying ESG and how we pay executives and employees within companies over time.

Reflecting on that response, if I go back to the 32 companies that we’ve summarized, I think it was pretty clear that the ones that they were focused on in terms of the ES and G was again diversity and inclusion and company culture.  That was the first most common factor.  And then the second most common one was that was mentioned was climate change on business.

But interestingly, where ESG gets tied to long term incentives, that wasn’t as common.  So I think at the moment, out of those 32 companies, only three percent of companies were currently tying ESG to long term incentives.  It was a technology company and they were focused on driving an inclusive culture and promoting parity in the representation of women in leadership.  So that connection of ESG to LTI was really focused in the D and I area. 

Similarly, when we look at the response from the Board Leadership Center, when they did a survey, we heard that about 81 percent of boards think that the company’s incentive structure encourages management to some degree to maximize short term returns.  And that was because of the way that rewards are currently structured.  So I think some of the key questions that directors and board level executives are asking is how do we get business leaders to change the incentive structure and drive ESG performance?  Or how effectively are we assessing and disclosing the company’s ESG performance. 

Leann: Parmjit, any last observations from your desk?

Parmjit: Look, I’d say that this area is continuing to evolve and it’s a really important one as companies determine what data they have to measure in the ESG space and then how they’re going to try to set goals that tie compensation meeting these goals.  It could be as simple as a modifier for long term incentives or rewards like that though typically get viewed as a carrot or a stick, because it may be that well, why are we paying employees or executives to do the right thing? They shouldn’t be paid for doing that, they should be doing that anyway.  And a modifier can be used to just modify a payout to align it better with actual performance.  So, for example, if we’re looking at ESG metrics and it’s taking a while to get to them, then there’s flexibility in adjusting the payout if we need more time to get to those goals.

So LTI is a difficult one, because obviously there’s more work that needs to be done around how to measure long term incentives when they’re tied to ESG.  But definitely on the short term incentive side, we are seeing more shifting where there is a tie.  And so I think over time, both long term and short term incentives will start to have an ESG component. 

Leann: So thank you for listening in on our recap from the ESG and reward webcast.  Should you wish to hear the replay, you can follow the link at the KPMG Impact area of our website to replay the full session and also see the links to other resources related to ESG and rewards. 

For our listeners, join us again next month for our next installment of Mobility via Podcast.  In the meantime, check out our previous podcasts or connect with us directly via e-mail at US-Taxwatch@KPMG.com.  Thanks again for listening.

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