As scrutiny on greenwashing gathers pace, it looks like there’s been an alarming number of “fluffy” pay bonuses for chief executives linked to potentially misleading metrics on ESG performance, according to new research from Macquarie University.
Rebecca Bachmann, a lecturer in accounting at the university, told The Fifth Estate that her research has found that ESG metrics have been historically “fudged” or restated so that this year’s results can be made to look a lot better if last years are made to look a bit worse.
Another research found that shareholders were now more likely to reject a chief executive’s remuneration report, with the highest number of “no” votes recorded between this year and last year.
Bachmann attributes the change to increased public pressure, new mandatory ESG reporting standards and increased scrutiny shareholders are now placing on CEOs.
“If we go back five to 10 years, I’m not sure the same discussion would have happened. It would have been, ‘Oh, yeah, as a CEO, they get a lot of money, but let’s move on.’ Whereas now there’s quite an active discussion happening,” Bachmann said.
More about the alarming figures and fudging numbers
In October 2023, Bachmann, along with her colleague and the University of Technology Sydney associate professor Helen Spiropoulos, released hand collected findings from 670 observations amongst more than 215 individual companies who had voluntarily reported their ESG or corporate social responsibility (CSR) metrics and executive pay amongst the ASX top 500.
Companies would routinely adjust previous ESG results to make their current results look better – a practice known as “restatement”
Between 2004 and 2020, Bachmann’s findings showed that 14 per cent of the companies observed had made restatements on their ESG reporting, which was voluntary at the time, and some companies had made up to 18 restatements.
Companies can’t seem to get gender equity right
Bachmann says that the statistics being restated should generally not have “directional bias” in terms of whether the numbers were changed upwards or downwards. However, she became suspicious after directional bias heavily skewed downwards regarding gender and equity statistics.
We [found] that most of this bias was towards making last year’s performance look worse, ultimately making it easier to say that ‘improvements have occurred’, and these are usually in the social aspect [of ESG].
“Those [restatements] could be in relation to gender diversity, OHS as well as environmental metrics like carbon emissions. And we did find that most of this bias was towards making last year’s performance look worse, ultimately making it easier to say that ‘improvements have occurred’, and these are usually in the social aspect [of ESG].”
Bachmann added that social statistics would often be amended using excuses of “not including casual employees” or “we should have involved contract workers, so now we are changing it again” – and oftentimes, gender equity would be lowered to appear that numbers have improved in the current year.
“Gender diversity shouldn’t be that hard to measure – let’s just for simplicity say – you take your female employees over total employees. Done.”
“We would like reporting requirements to be improved and that there are some solid guidelines on ‘this is how we measure x, this is how we measure y’, there’s just so much variation going on,” says Bachmann.
Her findings suggest that numbers adjusted on these ESG reports would also be massive – with an average size of 28 per cent of the original value reported.
And CEOs are patting themselves on the back
A US-based report released in late 2022 by the ESG data analytic firm Conference Board and Esgauge found that three quarters of the S&P 500 companies disclosed that increased ESG metrics were one of the reasons for executive pay bonuses. Of these, 51 per cent of these metrics were tied to meeting diversity and inclusion goals in 2021, rising from 35 per cent in 2020.
It also found that executive pay bonuses for meeting carbon footprint and emission reduction goals grew from 10 per cent in 2020 to 19 per cent in 2021.
Inspired by these reports, Bachmann and her research partner Spiropoulos also examined whether these trends were the case in Australia.
They found that 55 per cent of the companies they observed had CEO bonuses tied to ESG or CSR metrics, and these companies are twice as likely to make one or more adjustments to past ESG numbers.
Alarmingly, 33.5 per cent of adjustments were made to the ESG metric that led to the CEO’s pay bonus in the first place. Adjustments to these would also be larger, averaging about 36 per cent higher or lower than the original value.
Additionally, 17 per cent of the bonus pay would typically be attributed to good ESG metrics, roughly translating to approximately an extra $200,000 for the average CEO. The most suspicious statistic was that the majority of bonuses would be attributed to “increasing the proportion of female or Indigenous employees or cutting injury rates” rather than hitting a metric target.
And the biggest offenders? The financials and materials industry includes mining, chemical, construction, and forest products.
Environmental reporting and the need for more research
Amongst all ESG and OHS statistics, Bachmann says that while there are more restatements on environmental information than social, this was not necessarily surprising due to the historic lack of resources to measure environmental outcomes in the past.
“The reporting on carbon or water has changed, and it has become better over time, and that’s why, from an environmental perspective, we don’t see a directional bias as strong as social impact.”
As Bachmann finishes her soon to be released paper on CEO remuneration reports, collecting new and updated ESG reporting data could be her next endeavour, as sustainability statistics have been in high demand due to the nation’s move towards mandatory reporting. She added that collecting the data could be time consuming as important information would usually be hidden in little footnotes.
“I’m cautiously optimistic,” said Bachmann.
“What we are trying to do with this research is to encourage some consistency. CSR components in CEO paychecks can be quite significant in proportion, and there’s quite an incentive to meet those targets.”