Dive Brief:
- Sixty-nine percent of Standard & Poor’s 500 companies tie incentive compensation to at least one environmental, social and governance (ESG) performance measure, a 9 percentage point increase compared with last year, Willis Towers Watson said.
- Two out of three S&P 500 companies link pay to “social metrics” such as employee health and safety, or to diversity, equity and inclusion, WTW said after studying public disclosures by 900 companies in the U.S., Europe and Canada.
- U.S. companies still lag far behind their counterparts across the Atlantic, WTW said. All but 10% of European companies — including U.K. businesses — use ESG incentive metrics, with France and Germany leading at 100% and 98%, respectively, according to WTW.
Dive Insight:
Pressure from investors, the need to accelerate carbon emissions reduction and the reward in capital markets for companies that pursue long-term sustainability plans have prompted many companies to tie executive pay to ESG metrics, according to Michael Siu, WTW’s senior director for executive compensation.
“We believe the use of ESG metrics in compensation plans will remain steady over the coming years as companies fine-tune their existing ESG metrics tying them more directly to their strategic priorities,” Siu said Friday in an emailed response to questions.
“It’s worth noting that ESG, as a label, can be provocative in some circles but it includes relatively standard and highly-important metrics such as employee safety performance,” Siu said.
In recent years shareholder activists, regulators, lawmakers and other stakeholders have stepped up pressure on U.S. companies to gauge their progress in meeting ESG best practices.
Investors worldwide with assets exceeding $130 trillion want such information, according to Securities and Exchange Commission (SEC) Chair Gary Gensler. Worldwide investment in so-called sustainable mutual funds and exchange-traded funds has more than tripled since 2018 to $2.24 trillion, according to Morningstar.
The SEC is completing a proposed rule that would require companies to provide detailed disclosures on carbon emissions and climate risk.
The agency aims to mandate that companies describe on Form 10-K their strategy toward climate risk, including plans to achieve any targets they have set for curbing such risk.
Forty percent of companies worldwide use an environmental metric in incentive plans, while 72% apply a social metric and 45% use a governance metric, WTW said.
In the U.S., only 25% of S&P 500 companies apply an environmental metric as a compensation incentive, WTW said, although most of them recognize the relevance of such data to their business. Indeed, 92% of S&P 500 companies publish ESG reports, according to the Governance and Accountability Institute said.
