Half of Fashion Companies Not Linking ESG Targets to Compensation
Are the world’s biggest fashion brands and retailers matching what they say with what they pay? Surprisingly not, a nonprofit financial think tank has found.
According to a new report by Planet Tracker, more than half—that’s 57 percent—of 30 industry headliners, including Anta Sports, Foot Locker, Gap Inc., Levi Strauss, Nordstrom, Skechers, Uniqlo owner Fast Retailing and Victoria’s Secret, show zero links between executive compensation and their lofty ESG goals.
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Given that 70 percent of S&P 500 companies now incorporate sustainability metrics into executive pay schemes, this means that the apparel and footwear sector is a laggard in incentivizing social and environmental performance, said Richard Wielechowski, senior analyst of textiles and a co-author of the study.
“I think we have to be realistic that the goal of the corporation is always to make more money, and so unsurprisingly, that is the No. 1 way that executives are incentivized,” he told Sourcing Journal. “I was, I’d say, disappointed rather than surprised.”
Wielechowski said that tying the two concepts is a critical driver of credible action.
“It’s important because if you’re not incentivized to focus on something that’s at the margin—you know, you’ve had a busy day or things are troublesome in the office—you’re going to just let it slide,” he said. “Incentives, whether time pressure or money, is what can help focus attention within a corporate. And when you’re talking about senior executives, they’re setting the trends.”
But even the 13 companies that demonstrate a connection between C-suite remuneration and progress on their Science Based Targets have gaps in their approaches, Wielechowski said.
“A lot of them have sustainability goals or policies—they put out the reports, but whether or not they’re doing anything behind the scenes or whether or not it’s just verbiage that gets put out every year, it’s hard to tell without those targets and evidence,” he said.
In the case of seven of the 13—Calvin Klein owner PVH Corp., H&M Group, LVMH, Nike, The North Face parent VF Corp. and Zara owner Inditex—for instance, the link is based on qualitative rather than quantitative criteria. Of the six that employ quantitative ones—Adidas, Kering, Puma, Ralph Lauren, Hermès and Zalando—only Adidas, Puma and Zalando have explicit annual targets.
Ultimately, Planet Tracker found that only two companies—Adidas and Puma—have clear annual sustainability-linked objectives and reporting for executive pay.
“We’re not saying they’re perfect in trying to assess their actual sustainability goals, but…they at least have the structure in place to be able to pay executives for working hard on sustainability,” Wielechowski said.
There were some broader trends that Planet Tracker noticed. All the European companies in its sample show a connection between sustainability and performance-based pay, while their American counterparts are more of a “mixed bag.” Asian firms, on the other hand, generally trail the pack.
Wielechowski suggested that there could be a cultural difference, especially between Europe and America.
“I think maybe Europe is just a little bit easier with ESG generally, like it has a bit of a more positive relationship with it,” he said. “I think if you look at the way ESG has become quite politicized in the U.S., maybe that’s a factor. My experience is that, generally speaking, America has a much more driven and entrepreneurial profit-focused culture than Europe, where they spend half the summer on the beach.”
Founder and family-owned companies are also more likely to link performance-based pay with ESG.
“I think you can make an obvious assumption there that if you’re family owned…maybe you have a longer-term focus because the family is not necessarily there to make a quick buck on the shareholder return of the year—they’re thinking five, 10, 15 years, whatever it is, down the line,” Wielechowski said, noting that the study was funded by the H&M Foundation and the Laudes Foundation, both philanthropic vehicles founded by H&M’s Persson and C&A’s Brenninkmeijer families, respectively. “I think there’s a difference of timescales that they’re thinking about as the owners of a company.”
Fast Retailing said that it has “clear targets and KPIs” for its heads of departments in charge of store and e-commerce sales and supply chain management, while LVMH pointed to a document that shows that it has quantifiable in addition to qualitative targets.
A spokesperson for Puma, which has used targets from its sustainability strategy as executive bonus thresholds since 2010, told Sourcing Journal that social, economic, and environmental sustainability are “core values” for the sportswear maker and that the remuneration system for members of the management board is designed to create “incentives for long-term and sustainable corporate performance.” Adidas, meanwhile, said that its goal to “further drive change in the field of sustainability” and “move from effective stand-alone initiatives to a scaled and comprehensive sustainability program” underpins its C-suite compensation scheme.
Other brands mentioned in the report either declined to comment or did not respond to emailed requests.
Wielechowski said that investors should be asking fashion purveyors to “show me the money,” with performance-linked pay that is material (i.e. a meaningful percentage of compensation), independently verified targets and results, and, where possible, quantitative targets.
“If you’re an investor or holder of these companies, I would ask you to look again when you come to the [annual general meeting] and there’s a vote on the compensation report,” he said. “Are you really happy with the lack of clarity on sustainability? The lack of targets? And obviously, we would say you shouldn’t be. We shouldn’t be happy with just saying that you’re going to be green, we want to see evidence. I think we should be increasingly militant on that.”
