81% of global companies include ESG metrics in their executive incentive plans, and the use of climate metrics has expanded significantly.
This is the news from the latest release of the Global Report on ESG Metrics in Incentive Plans 2023, the fourth of its kind from professional services and solutions provider WTW.
The report, based on public disclosures from over 1,100 companies in major indices across Europe, the US, Canada, and the Asia Pacific region, highlights a growing trend of aligning executive pay with sustainability goals, with ESG metrics now used in 81% of executive incentive plans globally, an increase from 77% in 2022.
“Companies’ interest in tying executive incentive plans to ESG measures is showing no signs of abating,” said Richard Belfield, leader of WTW’s Executive Compensation & Board Advisory Practice. “In fact, companies in some industries such as IT and consumer goods that have previously shied away from using ESG measures are now joining in with the wider trend and have narrowed the gap with other industries.”
This trend is particularly pronounced in Europe, where 93% of companies utilise ESG metrics in their incentive plans, likely due to a more established regulatory framework emphasising such metrics. The US, on the other hand, lags behind at 76%, potentially impacted by politicisation surrounding the term “ESG,” however this has seen an increase from 63% nonetheless.
While over three-quarters of APAC companies disclosed the use of at least one ESG metric in their executive compensation plans, there is a notable disparity between developed and developing markets within the region.
Countries like Australia, Japan, and Singapore boast robust executive compensation disclosure practices and a high prevalence of ESG metrics in incentive plans, similar to their counterparts in Europe and North America.
In contrast, other parts of APAC are still in the early stages of developing their executive compensation practices, and the use of ESG metrics remains less common.
The report also reveals a shift towards including ESG metrics in long-term incentive plans (LTIs) rather than just short-term ones (STIs). In Europe, for example, the use of ESG metrics in LTIs has jumped from 21% in 2020 to 56% in 2023, with a particular focus on environmental and climate metrics. Meanwhile, the use of ESG metrics in STIs remains high across all regions, with 88% of European companies incorporating them into these plans.
The report further details the types of ESG metrics most commonly used by companies. Social metrics, encompassing factors like human capital and customer service, are the most prevalent, followed by environmental metrics related to climate change and resource management. Governance metrics, focusing on areas like risk management and corporate social responsibility, are also used by a significant proportion of companies.
“The ongoing growth we are seeing reflects the continued focus from companies across markets and countries to articulate to stakeholders how ESG priorities are embedded in their business strategy and how they are used as a key measure of non-financial performance,” adds Belfield.
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