‘WHAT GETS MEASURED, GETS PAID’

One of the main challenges for companies in linking compensation incentives to ESG performance is the long-term nature of social change and climate goals within the short-term nature of Canada’s tax regime, says Don Begun, a partner at Osler, Hoskin and Harcourt LLP. based in Toronto.

While Canadian investors spur action within corporate Canada, they should demand governments keep pace, Mr. Begun says.

“What gets measured, gets managed, [and] what gets measured, gets paid,” he says. But “If you’re trying to measure or quantify certain of these ESG metrics, I think it’s hard to evaluate them in a short-term period.”

Canada’s deferred compensation rules allow companies to defer bonus payments for a maximum of three years, he points out.

“The existing policies we have in Canada are impeding the effectiveness of ESG objectives and compensation arrangements, because of the different time horizons,” he says.

“ESG objectives really need to be measured over a longer period because, in many instances, hiring reform or whatever it might be, three years is really not enough time to measure how successful you’ve been and what changes you may have introduced.”

There are a couple of options, he says: The government could simply clarify that arrangements to defer employment income linked to ESG objectives are not considered to have tax deferral as the main purpose and adopt a broader approach than the three-year rule in those cases.

Or, it could go as far as introducing a new statutory regime that includes deferral longer than three years for compensation linked directly to ESG goals.

“It really needs to come from the government, because the CRA [Canada Revenue Agency] doesn’t make policy. The CRA is administering the legislation and the legislation, as it currently stands, says I can’t defer longer than three years,” he says.

It’s not ESG-specific, but the United Kingdom has allowed a five-year deferment, he says. And there is no reason such a rule couldn’t be specific to environmental, social and governance metrics, he adds.

“There clearly is a move in some jurisdictions to longerterm deferrals that could align with longer-term objectives and ESG-related policies,” Mr. Begun says.

DENE MOORE, SPECIAL TO

THE GLOBE AND MAIL