Shopping Center REIT Introduces ESG Scorecard with Few Specifics

March 30, 2022


Regency Centers Corp. (NASDAQ:REG) is one of the largest developers and operators of upscale open-air shopping centers with grocery stores as anchor tenants in the United States. As of the end of 2021, the real estate investment trust (REIT) owned 405 properties comprising 51.2 million square feet of space.

As part of the business description included in its recent 10-K, Regency described its mission “to create thriving environments for retailers and service providers to connect with surrounding neighborhoods and communities” with a vision of “elevat[ing] quality of life as an integral thread in the fabric of our communities.”

In support of these objectives, Regency introduced an ESG scorecard to its 2021 short-term incentive plan (STI), comprising 20% of the award. Covering the various facets of ESG, its scorecard explicitly names its people, communities, ethics and governance, and environmental stewardship as the dimensions on which executives will be judged. These areas align with Regency’s “Four Pillars of Corporate Responsibility.” Although some of these dimensions have key elements that could be quantified such as “reduction in Scope 1 and Scope 2 emissions,” “employee turnover,” and “cyber-risk management and training,” Regency chose not to disclose any goals set in advance or achievements against the goals in its proxy statement. Although it is not certain that achievements against the ESG scorecard elements are qualitative, from the disclosure, that can’t be excluded.

In addition to a lack of specificity as to goals, Regency ties the payout for performance against the scorecard as a function of financial performance. In 2021, Regency executives were deemed to have “achieved” their ESG goals. The financial component of the STI award paid out at 160% of target; therefore, the ESG portion also paid out at 160%. Of note, if the financial metric portion had paid out at less than target, the “achieved” ESG component would have paid at target. This might lead some stakeholders to believe that the ESG scorecard could be used by the board to cushion bonuses in the event of less-than-expected financial performance.

As investors continue to engage with companies and expect more than just financial results from their investments, more companies will adopt quantifiable ESG metrics with disclosed goals. Investors want “teeth” in compensation plans with measurable outcomes. Discretionary components, including ESG scorecards, cannot look like a giveaway to executives, protecting them from the downside of sub-target financial performance.

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