Dive Brief:

• Seventy-six percent of Standard & Poor’s 500 companies used at least one metric for environmental, social and governance performance when creating executive incentive plans last year, a jump of 14 percentage points since 2020, Willis Towers Watson said.
• The share of U.S. companies using climate and environmental metrics in incentive plans has surged to 44% from 12% during the past three years, WTW said, noting regulations requiring climate risk disclosure enacted in Europe and California, and planned by the Securities and Exchange Commission.
• The new and pending rules have spurred more use of ESG in pay incentives, Ken Kuk, WTW’s work and rewards senior director, said in an email response to questions. “But I would also argue that some of the regulatory pressure was already ‘baked in’ over time.”

Dive Insight:

The biggest U.S. companies are weaving ESG into pay incentives despite a backlash against the use of sustainability as a metric for corporate performance. The opponents — including Republicans such as former Vice President Mike Pence — have labeled the focus on ESG a cornerstone of “woke capitalism.”

Investors have cooled to ESG goal setting, with the flow of capital into sustainable funds worldwide waning during several quarters. Such inflows fell to $13.7 billion during the third quarter from $23.6 billion during Q2, according to Morningstar. Investors during Q3 pulled $2.7 billion from U.S.-based sustainable funds.

U.S. company use of ESG metrics in pay incentives “has probably got to a point where we will see some plateauing going forward,” Kuk said, adding that “it’s hard to make sweeping comments about this, as every organization is likely making their own calculation as to how they would react to these market sentiments.”

At the same time, “for companies that already have ESG metrics in place — and some have put them in not too long ago — removing them presents bad optics,” he said.

Also, “many companies still believe that these factors are important business priorities: keeping employees safe, engaged and productive; better customer satisfaction; maintaining a good relationship with the community that is their customer base; stronger governance of risk; creating more sustainable products for their customers.”

Companies in the U.S. and elsewhere rely on a mix of empirical ESG goals and qualitative metrics, WTW said, with those in the U.S. favoring qualitative assessments.

Regulators in the U.S., U.K., Europe, Japan and other jurisdictions are either ramping up or considering mandatory ESG reporting rules with the aim of providing investors with consistent and comparable company disclosures.

Currently, investors must choose from a jumble of often conflicting frameworks and measurements for corporate reporting on ESG performance.

WTW expects “that we will continue to see a shift to more quantitative measurement primarily because that’s what investors will be pushing for,” Kuk said.

“Oftentimes, qualitative assessments are scrutinized as soft targets and investors’ view would be that if a company puts in a non-financial metric, there needs to be transparency in how achievement is measured,” he said.

Seven out of 10 S&P 500 companies report metrics on so-called human capital, the most widely used ESG category, WTW said.

Companies most commonly track the human capital subcategories of employee engagement, or the measurement of employee sentiments, and the proportion of women and ethnic/racial representation in the workforce and management, WTW said.

“In some cases,” Kuk said, “the notion of ‘diversity’ in representation may extend beyond gender and race, such as disability, veteran status and neuro-diversity.”

WTW derived its data on U.S. companies from proxies filed from October 2022 through September 2023.