Growing trend of ESG metrics in executive pay

A recent global analysis conducted by WTW, a leading risk consultancy, reveals a significant global trend: the integration of Environmental, Social, and Governance (ESG) metrics into executive incentive schemes, with European companies at the forefront of this movement. This trend signifies a pivotal shift in corporate governance, emphasising the importance of sustainable and responsible business practices.

European leadership in ESG integration

The study highlights that an overwhelming 93% of major index companies in Europe have now embedded at least one ESG metric into their executive incentive plans, marking a substantial increase from 90% in the previous year and a notable rise from 75% three years ago. This growth is most evident in Long-term Incentive (LTI) plans, which now frequently incorporate ESG metrics across various European nations.

The surge in ESG metric adoption is primarily fuelled by the increased inclusion of environmental and climate change considerations, which have seen their prevalence in executive incentive plans jump from 21% in 2020 to 56% in 2023. Additionally, 88% of European firms link their short-term incentive (STI) plans to ESG measures, with a significant focus on social metrics (87%), covering areas such as human capital and customer service. Environmental measures are also widely adopted, with 80% of companies addressing issues like climate change and carbon emission reduction. Governance measures, focusing on risk management and corporate social responsibility, are utilised by 62% of companies.

Widening adoption across industries

The research indicates that industries traditionally hesitant to adopt ESG measures, including Information Technology and consumer goods, are increasingly aligning with this trend, demonstrating a closing gap with other sectors. This shift underscores the growing recognition of the importance of ESG priorities in business strategy and non-financial performance assessment.

WTW’s study, which reviewed public disclosures from 1,146 companies across major indices in Europe, the United States, Canada, and the Asia Pacific, reveals a broadening adoption of ESG metrics worldwide. In the United States, the incorporation of ESG metrics in executive incentive plans has risen from 69% to 76%, and in the Asia Pacific region, from 63% to 77%. Canada shows a steady rate of 80% adoption, highlighting a global consensus on the importance of ESG considerations.

The use of ESG metrics is predominantly seen in STI plans in the United States and Canada, with a notable increase in their prevalence in LTI plans, albeit from a lower starting point compared to Europe. The inclusion of environmental and climate metrics in Canadian companies’ LTI plans has notably increased, reflecting a broader commitment to addressing climate change.

Human capital metrics remain a key focus, with over 70% of companies in the United States and Canada incorporating at least one such metric in their executive incentive plans, emphasising the critical role of human resources in achieving sustainable business success.

This trend towards integrating ESG metrics into executive incentive plans is a clear indicator of the evolving corporate landscape, where sustainability and responsible governance are becoming integral to business strategy and performance evaluation. Asset managers and stewardship teams engaged in sustainable investing will find these insights particularly valuable as they navigate the complexities of ESG integration in investment decisions.

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