Volkswagen Group plans to link top executives' bonuses to environmental, social and governance (ESG) targets as the automaker seeks to bolster sustainability credentials that are increasingly relevant to investors.
VW will seek shareholder approval for the updated remuneration system at its annual general meeting next year, Chairman Hans Dieter Poetsch told Bloomberg News in an interview.
Executives' compensation includes the bonus, a fixed salary and a long-term incentive plan linked to share-price performance.
"Integrating ESG criteria into the bonus calculations for our management board offers concrete incentives to pursue the sustainability goals we have outlined," Poetsch said. The progress of ESG initiatives will be tracked via key metrics including internal decarbonization and diversity indices, he said.
The announcement comes as a growing number of financial companies, from banks to private-equity firms, attempt to retool their businesses and portfolios for a future largely free of fossil fuels.
While the move echoes similar steps by BMW and parts supplier Continental, the implications of the world's best-selling automaker stepping up its environmental efforts in particular are vast. The company has 125 factories in countries from Brazil to China and estimates its cars alone account for 1 percent of global carbon-dioxide emissions.
The group has pledged to become carbon-neutral by 2050 in a major strategy overhaul focused on building the industry's largest fleet of electric cars.
VW has added ESG targets to its strategic goals and calculates bonuses using a range of factors including the group's operating performance and, in the future, also ESG improvement. CEO Herbert Diess received a bonus of just over 3 million euros ($3.7 million) for last year, roughly twice as much as most management board members.
"The market is starting to view ESG performance as positively correlated with financial performance, and to think about ESG as an enhancer of investment returns rather than something requiring a trade-off," Richard Butters, an analyst at Aviva Investors, said in a report last month.
VW boosted its ESG efforts in the wake of the diesel-engine scandal that erupted five years ago when regulators uncovered widespread cheating on emissions tests.
Larry D. Thompson, who headed the U.S. government's prosecution of Enron, and in September completed a stint overseeing VW as part of a plea agreement with the Justice Department, said the company can be "a long-term and sustainable ethics, integrity and compliance success."