London — With millions out of work or now reliant on the government for their pay checks, ESG investors are preparing to scrutinise executive pay as never before.

While some companies began to link compensation of top managers with their performance on social and environmental issues before this year, the idea is set to gain much greater traction after the coronavirus outbreak, according to $1.1-trillion asset manager Nuveen.

The economic consequences of the spreading Covid-19 pandemic would cause investors to question the existing structure of executive pay and how to incentivise corporate bosses to put greater emphasis on environmental, social and governance issues, said Peter Reali, Nuveen’s New York-based head of engagement.

“No compensation plan will be left unchanged by Covid-19,” Reali said. “Companies can’t afford to be deaf on compensation in terms of the societal context, and the virus will further the conversation among investors on how ESG should effect wages, bonuses and incentives for executives.”

The fallout from the deepest worldwide downturn since the Great Depression, which has seen businesses respond to lockdowns by laying staff off permanently or temporarily, is unevenly distributed and has magnified economic and social inequality from the US to Italy. Within this context, executive payouts will be followed more closely than ever, as will the metrics by which managers are graded: are bosses encouraged to think of the company’s share price, or are managers also looking at how they treat their employees and the environment?

Companies across the world, including Barclays, L’Oreal SA and Renault, have reduced the compensation of senior executives in recent weeks because of losses from the global pandemic.

Scott Minerd, chief investment officer of Guggenheim Investments, said in a note on Sunday that “the most financially vulnerable households are experiencing the majority of layoffs” and a tepid economic rebound could lead to a “populist revolt to address huge inequality of income and wealth” in the US. Soon “pressure will mount on policymakers to bolster the social safety net and increase things such as health care and job security, and maybe even institute a guaranteed living wage”, he said.

The International Corporate Governance Network, which is led by investors that oversee $54-trillion worth of assets, said last week that executive pay “should reflect the experience of the overall workforce, particularly in relation to staff redundancies, furlough programmes, pay level reductions or bonus awards”. Remuneration policies should “seek an equitable treatment of ordinary staff with that of senior executive management and financial sacrifice appropriately shared”.

Tying executive pay to ESG targets is not a new idea. A Bloomberg analysis last year found that 500 corporations worldwide from Danone SA to General Motors already did so to some extent. But coronavirus will accelerate the trend. And there is plenty of room for improvement. Deloitte said earlier this month that just 14% of companies in a survey of 350 global executives now tied senior leaders’ compensation to environmental-sustainability goals.

And even for those companies with ESG-linked pay policies, it was often not clear how those ESG factors actually effect pay outcomes, Reali said. Nuveen said it expected boards of directors to establish executive compensation programmes that “appropriately incentivise and hold accountable” executive management, and which should include environmental and social metrics “where material”.

The 2020 proxy season, which kicked off this month, could prove a good test of growing investor interest in the topic, said Reali. The response to shareholder proposals on pay filed late last year at companies such as Apple, Amazon.com and United Airlines Holdings would illustrate how investors continued to view ESG as an investment risk, he said.

“Covid-19 highlights the importance of ESG, which should have already been part of the conversation around issues related to supply chain risk and health and safety of workers,” said Reali. “It also exposes companies that are unable to deal with future incidents of rapid and unexpected global turmoil where there’s some big shock to the market. Some would say climate change falls into that category.”


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