Wednesday, February 28, 2024

Volkswagen to link top executives’ bonuses to the achievement of ESG objectives

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Volkswagen AG plans to tie top executive bonuses to environmental, social and governance goals as the German industrial giant seeks to strengthen the sustainability benchmarks that are increasingly relevant to investors.

VW will seek shareholder approval for the updated compensation scheme at its annual general meeting next year, Chairman Hans Dieter Poetsch told Bloomberg News in an interview. Executive compensation includes the bonus, a fixed salary and a long-term incentive plan linked to the performance of the share price.

“The incorporation of ESG criteria into the bonus calculations for our board of directors offers concrete incentives to pursue the sustainability goals that we have defined,” said Poetsch. The progress of ESG initiatives will be tracked through key indicators, including internal decarbonization and diversity indices, he said.

The announcement comes as a growing number of financial firms, from banks to private equity firms, are trying to reorganize their businesses and portfolios for a future largely free of fossil fuels.

While the movement echoes similar stages by Bmw AG and parts supplier Continental AG, the implications of the intensified environmental efforts of the world’s best-selling automaker are particularly vast. The company has 125 factories in countries ranging from Brazil to China and estimates that its cars alone account for 1% of global carbon dioxide emissions. The group is committed to becoming carbon neutral by 2050 as part of a major strategic overhaul focused on building the largest fleet of electric cars in the industry.

VW has added ESG goals to its strategic goals and calculates bonuses using a range of factors, including the group’s operational performance and, in the future, ESG improvement. CEO Herbert Diess received a bonus of just over 3 million euros ($ 3.7 million) for last year, about twice as much as most board members.

“The market is starting to view ESG performance as being positively correlated with financial performance, and to view ESG as a factor in improving investment returns rather than something that needs compromise,” said Richard Butters, analyst at Aviva Investors, in areportlast month.

VW has stepped up its ESG efforts following the diesel engine scandal that erupted five years ago when regulators discovered widespread cheating on emissions testing. Larry D. Thompson, who led the US government’s lawsuit against Enron Corp. and made a switch to VW oversight in September under a plea deal with the Department of Justice, said the company could be “an ethics, integrity and compliance success.” “

Surveillance issues

While VW has made progress in identifying potential wrongdoing, its complex governance and shareholder structure remain a concern for investors. Black rock Inc., the world’s largest asset manager, reiterated its criticism in October that VW’s supervisory board lacks sufficient independent oversight.

Outsiders have little influence at VW as just over 90% of the voting shares are held by the three main shareholders: the billionaire Piech and Porsche clan, the German state of Lower Saxony and the sovereign wealth fund from Qatar. Poetsch acknowledged the long-standing criticisms, but argued that the company largely complies with German corporate governance rules and welcomes the involvement of its major shareholders.

Comparing ESG initiatives across sectors is complicated by the different methodology and priorities used for ratings from providers such as MSCI Inc., Sustainalytics, and the Carbon Disclosure Project. The depth of data disclosed by companies can also vary widely from region to region and is less standardized than, for example, financial reporting based on established accounting standards.

VW has adjusted its peer groups to reflect the company’s new strategy focused on electric vehicles and expanding software operations, Poetsch said. He added car manufacturers You’re here Inc. and WORLD Co. as well as technology companies SAP SE, Uber Technologies Inc. and Samsung electronics Co. and will release its peer list in the future, he said.

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