Hosking Partners is a London boutique founded in 2013 by Jeremy Hosking, a portfolio manager at Marathon Asset Management for over 25 years. It runs a single global equity strategy built on the capital-cycle, supply-side approach — contrarian, long-term, and unusually diversified (350+ holdings) under a multi-counsellor model, managing around $5.5bn.
This report is skeptical of companies linking executive pay to ESG goals, calling it a 'group soothe' that adds complexity. The author is cautious, arguing that good ESG pay must tie directly to long-term strategy. Three positive examples are highlighted: Alcoa (AA) links bonuses to safety and environmental management; Suncor (SU) includes Indigenous board representation; Philip Morris (PM) ties 30% of variable pay to smoke-free product revenue. The author warns that poorly designed ESG pay can harm minority shareholders.
The author is highly skeptical of the effectiveness of ESG-linked compensation incentives, viewing them more as a "group appeasement" response to pressure rather than a genuine driver of long-term value [Cautious].
The article argues that incorporating ESG metrics into executive compensation has become a global trend, yet its practical implementation is fraught with complexity and may fail to genuinely incentivize executives to address externalities, instead devolving into "greenwashing." The author opens by quoting William Cameron and Charlie Munger, highlighting the core tension between "not everything that counts can be counted" and "incentives determine outcomes." The report contends that amid the shift from shareholder primacy to stakeholder capitalism, embedding ESG key performance indicators (KPIs) into compensation represents an attempt to address market externalities. However, the reality is far more complex than the ideal.
| Region | Proportion of Companies Adopting ESG KPIs | Trend |
|---|---|---|
| Large U.S. Companies | Over 50% | Significant growth over the past three years |
| U.K. Companies | 45% | Significant growth over the past three years |
The author states: "However, while aspirationally admirable, a closer look at the reality of implemented plans and a healthy dose of scepticism leads us to observe that many examples of ESG-linked remuneration add even more complexity to an already opaque situation, rather than truly incentivise executives to address externalities." In other words, while commendable in aspiration, a closer examination of implemented plans and a healthy dose of skepticism reveals that many ESG-linked compensation examples add further complexity to an already opaque situation, rather than genuinely motivating executives to tackle externalities.
The report argues that there is no definitive empirical consensus proving that ESG practices have a clear positive impact on corporate profits or value creation, particularly in the short term. The author notes that despite extensive research, the effect of ESG practices on corporate profits or value creation—especially over short horizons—remains ambiguous. A less idealistic rationale is that sustainability considerations have historically been subordinated to growth, profitability, and stock price, so adding ESG metrics is intended to "focus" executives who are not aligned. However, the real driving forces are more regulatory and investor ultimatums, a trend unlikely to weaken in the coming years.
The author uses Shell and Sibanye-Stillwater as examples to illustrate that condensing complex ESG considerations into a handful of compensation metrics is extremely difficult in practice and may even backfire. The article raises a key question: How can a global company's ESG considerations be distilled into a few metrics? For instance, Shell recently incorporated emission reduction targets into its long-term incentive plans (LTIPs). While this seems reasonable for an oil and gas company, for many other enterprises, such a narrow focus appears "quite blunt." Another example is the mining company Sibanye-Stillwater, where health and safety metrics are critical. However, should compensation reward "proactive prevention" (e.g., training) or "punitive measures" (e.g., pay cuts after accidents)? The former is conceptually superior but harder to implement, as it requires measuring a "counterfactual" (i.e., how many accidents would have occurred without preventive measures).
The author is highly skeptical of the effectiveness of ESG-linked compensation, viewing it more as a "group appeasement" response to regulatory and investor pressure, which may even distort incentives. For example, companies with low capital intensity can easily commit to net-zero targets. If emission reduction goals are tied to compensation, such commitments may actually incentivize them to stretch their decarbonization timelines to continue earning rewards. The author emphasizes that optimal incentives should align with corporate strategy and encourage a long-term perspective, rather than simply layering on ESG metrics. Readers should note that this perspective comes from Hosking Partners, an active investment manager that is itself critical of ESG ratings and standardized frameworks.
The author argues that the most reasonable ESG compensation plans, without exception, achieve two things: they are highly aligned with group strategy and reflect prudent long-term thinking. The author uses three specific cases to support this view.
Alcoa linked its long-term incentive plan (LTIP) to safety and environmental management as early as 2013. The author considers this a wise move, as it recognizes that maintaining the "license to operate" is a comprehensive issue spanning strategic, financial, and non-financial objectives.
Suncor incorporated indigenous representation on the board and management inclusivity into its performance targets. The author believes this reflects the company's understanding of and commitment to the communities where it primarily operates.
Philip Morris tied 30% of its variable compensation to what it defines as "transformation"—namely, the percentage of smoke-free product revenue relative to total group revenue. The author's original statement is: "not only reinforces group commercial strategy, but also speaks to a strategic orientation towards harm reduction that is materially incentivised at the highest levels."
The author explicitly states that in communications with these companies, they have consistently publicly supported these plans because their execution aligns with creating sustainable long-term value.
The author's core stance is that ESG compensation incentives should neither be simply dismissed nor fully embraced; rather, investors should identify and embrace their complexity, as it harbors investment opportunities. The author concludes by citing Hosking Partners' own investment philosophy, emphasizing that its "capital cycle"-driven methodology aims to "recognise reality," rather than chasing trends or saying the "right things."
The author quotes Charlie Munger (implying that inappropriate compensation incentives may harm minority shareholder interests) and notes that, upon proper scrutiny, executive compensation plans can serve as warning signals for potential adverse outcomes for minority shareholders. Therefore, for investors, the key lies in identifying those complex plans that are truly aligned with long-term value creation and uncovering investment opportunities within them.
| Ticker | Direction | Author's One-Sentence View | Key Data |
|---|---|---|---|
| Alcoa | Hold for Observation | The author publicly supports its ESG-linked compensation plan, believing it aligns with long-term value creation | LTIP tied to safety and environmental management since 2013 |
| Suncor | Hold for Observation | The author publicly supports its ESG-linked compensation plan, reflecting an understanding of the operating communities | Incorporates indigenous board representation and management inclusivity into performance metrics |
| Philip Morris | Hold for Observation | The author publicly supports its ESG-linked compensation plan, arguing it reinforces business strategy and incentivizes harm reduction | 30% of variable compensation linked to smoke-free product revenue share |
| Shell | Not Specified | The author believes including emission reduction targets in LTIP seems reasonable for an oil company, but the focus is narrow and rigid | Added emission reduction targets to LTIP |
| Sibanye-Stillwater | Not Specified | The author notes the difficulty in quantifying health and safety metrics, and the complex trade-off between proactive prevention and reactive penalties | Question remains whether compensation should reward "proactive prevention" or "reactive penalties" |