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Boohoo Group is the latest publicly-listed company to tie executive remuneration arrangements to specific Environmental, Social, and Corporate Governance (“ESG”) targets in order to demonstrate its commitment to sustainability and the societal impact of its operations. On the heels of widespread reports of unethical practices in – and a subsequent investigation into – its supply chain this past year, the Manchester, UK-based fashion retailer has linked 15 percent of its executives’ annual bonuses to its “Agenda for Change,” the initiative that it launched in 2020 to promote ethical and sustainable working practices across its supply and logistics network. 

Following reports that it was considering tying executive pay to ESG targets, Boohoo confirmed in May that it would adopt the recommendation of Parliament’s Environmental Audit Committee that bonuses be linked to ESG improvements set out in its supply chain-centric “Agenda for Change” program, saying in a statement last month, “While we ultimately believe that the full resolution (or otherwise) of these (supply chain) issues will be reflected in long-term share price performance (and thus have an impact on the value of awards) we have also agreed with participants to add a new non-financial performance condition.” 

The association between Boohoo’s ESG targets and its executives’ bonuses has been capped at 15 percent, but the swiftly-growing company’s remuneration committee will have the power to scale back executives’ entire bonus if ESG progress is particularly weak. Specifically, “In the event of the committee determining that the Agenda for Change program has not been successfully implemented in full, we will have the ability to reduce the level of vesting of awards, irrespective of the share price growth achieved over the performance period,” Boohoo stated in its report. 

The executive remuneration plan will be voted on at this month’s general meeting, with the new bonus terms likely to be a welcome change for investors and shareholders, alike. More than that, the new approach and the incentives that come with it will likely be crucial for 15-year-old Boohoo’s continued success, as the company is still dealing with the fallout of reports of unethical practices in its supply chain, which led to nearly a billion pounds being wiped from its share value over the course of a single week. 

If retailers are keen to demonstrate and emphasize their commitment to ESG, then the way forward would be to follow suit. While 45 percent of FTSE 100 companies have either a ESG target in their annual bonus, a long-term incentive, or both, an analysis of UK-based retailers’ remuneration reports shows that few companies are incorporating ESG targets into their executive pay.

Among the potential outliers? Burberry has stated that it is considering incorporating non-financial performance metrics – including the achievement of ESG targets for senior leaders across the group – into its compensation structure. At the same time, on the heels of revealing that top executives had opted to forgo their bonuses for the 2020 fiscal year, Disney’s compensation committee stated in a letter to shareholders in January that the global entertainment company and retailer will highlight ESG metrics in its 2021 annual bonuses by giving diversity and inclusion the highest weighting among non-financial metrics.

Retailers that are considering linking ESG metrics to executive remuneration will primarily need to select the most material issues; that should be done even before considering whether to use input measures which focus on a company taking action (e.g. towards environmental initiatives, developing low carbon technologies) or output measures which represent an easily identifiable outcome (e.g. reducing carbon emissions). It is clear that while output measures are preferred by investors, the value of input measures should also be considered as part of the overall strategy. Moreover, the ESG metrics that a company decides to use should be transparent and easy to understand.

In light of increasing investor, shareholder, and consumer pressure in the ESG space, the news of Boohoo may be the beginning of a shift for retailers away from traditional financial performance metrics towards those that demonstrate a company’s commitment to ethical and sustainability values through executive pay.

Saba Palizi is a Senior Solicitor at Macfarlanes, where she specializes in employee benefits and is a member of the firm’s Remuneration practice.