Photo/Illutration Reducing greenhouse gas emissions, including through the use of photovoltaic power, is regarded as a component of corporate environmental, social and governance (ESG) practices. (Asahi Shimbun file photo)

Japanese companies are starting to pay part of director compensation based on how well they are achieving social responsibility goals, such as reducing carbon dioxide (CO2) emissions and promoting more women to managerial positions.

The moves reflect the trend of investors preferring companies that are engaged in environmental, social and governance (ESG) practices that emphasize sustainability.

The Nippon Telegraph and Telephone (NTT) Group this fiscal year introduced ESG-based criteria to determine the size of bonuses its corporate directors will receive.

The new policy covers board members and executive officers of NTT Corp., the holding company, and major subsidiaries, including NTT East Corp., NTT West Corp. and mobile carrier NTT Docomo Inc.

The telecommunications giant introduced three metrics: the amount of greenhouse gas emissions; earnings from business projects with a positive impact on society; and the ratio of women newly promoted to managerial positions.

For example, NTT has set a goal of limiting greenhouse gas emissions to a maximum of 3.075 million tons this fiscal year. Whether that target is attained or neared will be reflected in bonus sizes.

NTT plans to achieve carbon neutrality, or net zero greenhouse gas emissions, across the entire group by fiscal 2040.

Two other measures for calculating the bonuses are NTT’s earnings target of 600 billion yen ($4.4 billion) this fiscal year from business projects with a positive social impact, and its goal of having women represent 30 percent of newly promoted managers.

Bonuses accounted for about 30 percent of the total remuneration of 377 million yen paid to the four in-house members of NTT’s board of directors last fiscal year.

Starting this fiscal year, assessments based on the three ESG measures will be reflected in 5 percent each, or 15 percent in total, of their bonuses. Operating profit and other financial indicators previously accounted for a larger part of the criteria for calculating bonuses.

“Making contributions to a sustainable society matches the public nature of NTT’s operations,” an NTT official said about the ESG goals.

Panasonic Holdings Corp. plans to introduce similar ESG-based criteria this fiscal year.

Officials of the electronics giant said the measure, currently being worked out, is intended to raise the awareness of management members that the company faces growing pressure to address environmental issues.

Airline ANA Holdings Inc. and retailer Seven & i Holding Co. have also introduced programs linking their directors’ remuneration with the achievements levels of their CO2 emission reduction goals.

Kao Corp., a manufacturer of cosmetics, household goods and other products, is using ESG-based criteria to determine director compensation levels and in part of the assessment system of rank-and-file employees.

A survey conducted in July by consultation company Deloitte Tohmatsu Group showed that only 15 percent of Japan’s leading companies have programs linking director remuneration with ESG measures. The corresponding ratios were 77 percent for Britain and 60 percent for the United States.

“Even when it comes to Japanese companies, there will be growing attention to the stances of institutional investors and external board members,” said Yasushi Muranaka, a Deloitte Tohmatsu partner. “It is therefore essential to increase the proportion of the directors’ compensation linked with ESG indicators so the mechanism will be more effective.”

(This article was written by Yasuro Suzuki and Fumiko Kuribayashi.)

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