Prudential lifting use of ESG pay to support investment strategy
Prudential plc is increasing its use of sustainability-linked pay and raising the practice when it engages with investee companies, with an eye on driving positive environmental and social impact.
The Hong Kong-headquartered insurer recently introduced a remuneration-linked investment target under the transition finance framework it put in place this year.
It has also mandated sustainability-linked key performance indicators (KPIs) for all its managers by 2026 and is asking questions on climate-related pay when it engages with investee companies.
Prudential
“Our commitment to financing the transition has a lot of support from the top, as is shown by our linking of financing transition investments to remuneration,” said Liza Jansen, head of responsible investment at Prudential.
"This is creating change internally, including driving our interaction with asset managers on this topic.
“We are working with asset managers, looking for strategies across the different asset classes to find [transition finance] investment opportunities,” she told AsianInvestor.
“These include carbon-intensive companies in emerging markets [EMs] looking for capital to finance their transition from brown to green, where there is the biggest financing gap," Jansen said, with private markets providing many such opportunities.
Prudential, which operates life insurance businesses in Asia and Africa, has a strong focus on EM investments but does not publicly state how much they account for of its $160.9 billion of AUM.
Kuala Lumpur-based Jansen said she could not yet reveal the AUM-linked remuneration target, which is currently only mandatory for executive management.
Once Prudential has ‘road-tested’ the transition finance framework and governance process with a few transactions it has been working on, it plans to announce the target and how it is meeting it, she added.
The aim is to release the framework details publicly before the end of the year.
EXPANDING SUSTAINABILITY METRICS
The target was approved late last year and adds to the sustainability KPIs that Prudential already had in place for executive pay, Jansen said.
Overall, sustainability metrics make up 10% of the executive directors’ 2024 long-term incentive plan – their bonuses for this year – according to the firm’s Sustainability Report 2023, published in March this year.
Prudential is aiming to ultimately reduce the weighted average carbon intensity of its investment portfolio by 55% by 2030 from its 2019 baseline.
“We are prioritising engagement over divestments for advancing the transition, because we believe divestment ... means you lose influence [over the assets you sell], and the opportunity to support your portfolio of companies with their transition to net zero,” Jansen said.
This reflects a similar focus on transition finance among other insurers, such as Hong Kong-based AIA and Japan’s Nippon Life, and institutional investors generally.
ENGAGING ON ESG PAY
Prudential conducts its corporate engagement via its in-group affiliate asset manager, Eastspring Investments.
And pay is an area that Prudential seeks to raise with certain companies when discussing climate, said Jansen.
“We have quite a long list of asks, and a link to remuneration is one that we might put to a company that is more mature [in terms of sustainability and governance].”
Setting targets, such as on capital expenditure, and linking them to remuneration incentives, can provide very good incentives within a company and help demonstrate how companies “really walk the talk” in sustainability, she added.
Of course, remuneration won't be the starting point of the discussion, Jansen said. “If a company is not doing anything [in relation to reporting or measuring climate risk], we start with disclosure.”
Similarly, Prudential is unlikely to raise questions on ESG-linked pay with privately held businesses. It typically makes such investments via alternative asset managers, which tend to tailor their approach to each company.
“[As a result,] it's much more difficult to be very prescriptive with the asset manager on what they should be focusing on [in respect of engagement],” Jansen said. “However, we are engaging the asset managers to do engagement and what kind of questions to focus on.”
Asked whether Prudential could point to any positive impact or progress made as a result of ESG-linked pay, she said the insurer would consider this area but has not made any decision on it yet. It already monitors progress made through engagement generally.
ESG PAY PROGRESSING
Use of ESG pay is gaining momentum among corporates in Asia and globally, according to a survey published in January by consultancy WTW. ESG metrics are now used in 81% of executive incentive plans globally, an increase from 75% in 2022. In Asia Pacific the rise has been sharper, from 63% to 77% over the same period.
Implementation varies widely across Asia Pacific, however.
There is robust executive compensation disclosure and high prevalence of ESG metrics in such markets as Australia, Japan and Singapore. But in other parts of the region the use of ESG metrics remains uncommon, says the WTW report.
This suggests there is a sizeable opportunity for asset owners like Prudential to encourage the spread of ESG-linked pay.
That would be good news for the planet, noted a report published in September last year by IESE Business School in Barcelona.
There is emerging evidence that ESG pay can serve as an effective tool for reducing companies’ carbon emissions and supporting their long-term health, it said.