There is strong, and growing, guidance from influential stakeholders for companies to reflect environmental, social and governance (ESG) metrics in their executive compensation framework.
The Investment Association’s revised Principles of Remuneration guidance for the 2021 proxy season states that it is appropriate that Remuneration Committees consider the management of material ESG risks as performance conditions in variable remuneration, provided that they are clearly linked to the implementation of a company's strategy.
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In addition, the European Banking Authority (EBA) published a discussion paper on ESG risk management and supervision, aiming to collect feedback for the preparation of its final report. The discussion paper establishes that financial institutions should consider implementing a remuneration policy that links the variable remuneration to the successful achievement of ESG objectives.
Willis Towers Watson’s Global Executive Compensation Analysis Team (GECAT) has published its 2020 report on ESG metrics in top European companies, which shows that companies have started to take action.
Source: GECAT 2020 European ESG Report.
Key takeaways from this report are:
- More than two-thirds (68%) of top European companies use at least one E, S or G metric in their executive incentive plans. This represents a 5% increase on the previous year and, even accounting for changes in index composition, we expect this upward trend to continue.
- The year-on-year increase in prevalence is observed across all ESG categories, although most significantly (around 10%) in the environmental and broader governance categories.
Source: GECAT 2020 European ESG Report
Are you ready for these developments? Do you want to wait until stakeholders demand them? Be proactive and take the opportunity to get ahead of the crowd.
We're working with many clients to bring together HR, risk, sustainability and corporate responsibility teams to ensure a common understanding across the relevant functions of what is possible, meaningful and measurable.
For many organisations, this may ultimately result in the inclusion of one or more ESG metrics in short- and long-term incentive arrangements. The most appropriate way of reflecting ESG will depend on the strategic focus and culture of your company.
Our report provides a deep dive into the prevalence of ESG metrics and the way they are incorporated into incentive plan designs across different countries and industries.
