Executive pay at Australian banks could soon be tied to climate targets, a new report suggests, amid increasing scrutiny from investors

Executive pay at Australian banks could soon be tied to climate targets, a new report suggests, amid increasing scrutiny from investors
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  • New analysis from international investment firm Citi highlights the increasing pressure on Australia’s big banks to weigh executive pay against climate action.
  • It said 12 ASX200 companies linked executive pay to climate change in 2020. 
  • The report comes ahead of the bank’s annual general meetings this month, where shareholders are set to force more transparency around net-zero commitments.
  • Visit Business Insider Australia’s homepage for more stories.

How chief executives at Australian banks are paid could be linked to climate change targets in the future, according to a new report from Citi that analysed the impact of climate action on executive pay in 2020. 

It comes as investors are increasingly scrutinising banks over their exposure to coal, oil, and gas businesses, along with how they plan to lift financing of renewable energy.

New analysis of Australia’s ASX200 companies conducted by consulting firm PwC suggests that investor expectations continue to outpace the efforts of Australia’s largest companies amid shifting expectations. 

Matthew Lunn, ESG assurance lead at PwC Australia, said that while the broader Australian market had seen improvements, critical areas continue to go unaddressed. 

“We’re witnessing enormous investor-driven demand for information about a company’s commitment to ESG activities, which provides a significant opportunity to impress capital markets and reap the rewards of doing so by clearly demonstrating goals and commitments,” Lunn said.

Amid this mounting pressure, Citi analysts suggested investors may also start to push banks to include climate targets in the criteria for executive bonuses, something that has already occurred in some resources companies and other heavy emitters.

The report from Citi’s banking and environmental, social and governance (ESG) analysts said that 12 ASX200 companies linked executive pay to climate change in 2020. 

It cited figures from the Australian Council of Superannuation Investors, and noted energy companies were at the forefront of the movement globally. 

The report also suggested investors may hold banks to a higher standard than the minimum requirement of regulators, saying climate goals could be included in “scorecards” that influence bonuses.

“More sustainable financing is likely to remain a key issue for investors, and we expect that given global trends to link remuneration and sustainability, it could be linked into scorecards given the need to introduce more hard measures,” the analysts said.

Pressure on banks over climate change follows the push on lenders to move away from purely financial targets when determining bonuses after the 2018 Royal Commission said remuneration was a key contributor to misconduct.

The analysis also follows new findings on employee expectations around climate action by employers. 

Another report from the Australian Institute of Company Directors (AICD) on the actions of Australian businesses found that almost half of respondents have embedded climate change into risk management frameworks. 

ELMO’s Climate At Work report which surveyed the sentiment of Australian workers found almost half of Australians, including 71% of Gen Z and 52% of millennials report they would not work for a business that did not take action to address climate change. 

It found that 84% of Australians believe Australian businesses should do more to reduce their emissions and carbon footprint, along with 75% who believe that climate change action could generate new jobs. 

Cit’s analysis said that CBA had transformed its pay regime by giving the board greater discretion over bonuses in a way it says will lead to greater alignment between shareholders and executives’ interests.

In contrast NAB, ANZ, and Westpac were in a “holding pattern” for executive pay in 2021, but there would likely be bigger changes in 2022 when banks would incorporate new requirements from the regulator. 

Westpac, ANZ Bank, and National Australia Bank will all face shareholder resolutions over their climate change plans at annual general meetings this month, after the issue played a key part in Commonwealth Bank’s annual meeting in October.

It has also been flagged as a key issue by activist group Market Forces, which lodged shareholder resolutions with all three banks that will force them to disclose how they propose to meet “net zero” commitments by 2050.