Dive Brief:

• The pandemic, economic uncertainty and social and racial injustice have prompted companies to accelerate changes to their environmental, social and governance (ESG) priorities, a survey of boards of directors by Willis Towers Watson found. 

• "With institutional investor interest in ESG and sustainable investing increasing, companies are maintaining or accelerating their focus," Shai Ganu, global head of executive compensation at Willis Towers Watson, said. "Companies' focus is on a stronger alignment of executive compensation plans and ESG priorities, particularly with climate change and environmental measures, inclusion and diversity matters, and overall human capital governance."

• Nearly four in five respondents (78%) plan to change how they use ESG with their executive incentive plans over the next three years, and 41% plan to introduce ESG measures into their long-term incentive plans. Nearly three fourths of North American respondents have implemented at least one initiative to promote inclusion and diversity at their organizations, with another quarter planning or considering doing so.

Dive Insight:

"When we asked respondents what shapes ESG priorities, they said it wasn't about it being the right thing to do, but clearly there's a link to long-term value creation and strategy," Ryan Resch, managing director of executive compensation at WTW, told CFO Dive. "They're not just doing this from a marketing perspective; it's also a fundamental part of their business, and can drive value."

Forty-three percent of companies have conducted a pay equity analysis, and just under half have established or have supported internal inclusion and diversity networks, and another 32% are planning to do so. And 44% have increased their communication of policies and benefits that promote an inclusive culture.

Employers are also reviewing their workforces through an ESG lens, the survey said. Nearly half (46%) said they'd deployed listening strategies to engage with their employees, while three in 10 had created new executive roles specifically to drive and achieve ESG strategy.

Nearly half of respondents are either planning to review their culture to ensure ESG is embedded throughout their organizations or are considering doing so in the future, WTW found. 

"We will increasingly see companies make meaningful progress on ESG, but it will take time," Resch said. "Executives realize it's probably better to incorporate these into the long-term rather than annually."

In addition to culture, about 20% of respondents expect to add board and/or compensation committee oversight of wellbeing and fair pay within the next three years. The survey identified challenges companies face regarding ESG metrics use in incentive plans, including target setting (52%), performance measure identification (48%) and performance measure definition (47%).

While most companies are developing ESG implementation plans or have identified ESG priorities, less than half have incorporated ESG plans into all business aspects, including strategy, operations, and products and services offerings. This may indicate that companies are at different junctures on their ESG journey. 

Over half of companies are accelerating their ESG priorities and timing, and over three in four respondents believe ESG is a key contributor to stronger financial performance going forward.

"Although companies are revising their use of ESG measures to support their executive pay programs, it appears more work needs to be done," Resch said. "Boards have been asking for more information on ESG strategies and priorities, particularly in the areas of the environment and employee diversity, to understand their alignment to sustainable value creation and materiality. Their goal is to support the identification of the right measures for their incentive plans with appropriate performance targets."

Respondents' enduring focus on the environment came as a surprise to Resch and his team. "Given all that's happened in 2020, from a pandemic and workforce perspective, it's interesting that the environment remains the #1 priority over the next number of years," he said. "That was somewhat surprising. We thought there would be a greater shift to the social aspects of ESG this year, but that doesn't seem to have been the case; the environment is still clearly number one."

Eighty percent of respondents agreed ESG is a key contributor to value and stronger financial performance. "From a CFO perspective, I would look at that and say, ‘Okay, we need to do a better job of understanding our ESG strategy, and how it links to organizational value and financial performance," Resch said.

CFOs should prioritize and identify the most important measures and integrate them into the company's overall reporting, Resch added. 

"A lot of times, historically, ESG has been managed by a separate group focused on sustainability. Clearly, people now see it's not just a nice thing to do, but it improves financial performance and organizational value," he said. "That's where CFOs can partner with sustainability teams and draw those links."