Most UK small- and mid-caps link exec pay to ESG performance – Peel Hunt

The majority of small- and mid-cap companies in the UK now link some form of executive management remuneration to ESG performance, up from only a quarter last year, according to new research.

A report published by investment bank Peel Hunt, undertaken by specialist ESG consultancy SIFA Strategy, found that 86% of companies now have ESG performance embedded into executive pay packages, compared to 25% in 2021.

The report revealed that most companies are working towards, or have put in place, a link to short-term bonuses or LTIPs, or both, with up to 20% to 30% related to ESG. 

Meanwhile, the most frequently referenced ESG metrics regarding executive remuneration include carbon emissions, NPS scores, health and safety measures, and people-related metrics related to Diversity, Equity and Inclusion (DEI) or attrition rates.

The report, based on surveys with 72 small- or mid-sized quoted companies, showed that four out of five view ESG as positively aligned with shareholder returns, either as a factor of value creation or in driving higher resilience.

It found that 79% believe environmental factors, driven partly by regulatory requirements, will impact the valuation and performance of their company over the next decade, while 83% now consider social issues to be a core driver of value, and 77% rate governance.

Sunil Dhall, chief financial and operating officer at Peel Hunt, said: “Despite concerns around macroeconomic issues, ESG is still an important consideration for boards. The research findings show that the overwhelming majority of mid- and small-cap UK company boards are more concerned about ESG issues than ever. 

“Moreover, boards are taking action to ensure ESG is at the heart of strategy, with increased investment planned for next year and a focus on ESG-linked remuneration for executives. We also see no evidence that the capital markets are placing any less importance on ESG in their capital allocation decisions.” 

Last year, Peel Hunt found that only 26% of companies described their approach to ESG as embedded within strategy, with processes in place to reduce risk and identify opportunities. This year, that jumped to 52%.

However, only 13% of companies described ESG as “fully embedded” within their business and operations.

Next year, 71% of companies surveyed said they are likely to invest more time and/or resource into developing ESG.

Fergus Wylie, director and co-founder of SIFA Strategy, added: “This is our second annual research into the status of ESG within mid- and small-cap companies, and we have noted a significant uplift in the influence of ESG over the last year, which is noteworthy considering the many other issues management teams are facing from the tougher economic conditions.”

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