Over the past couple of years, the conversation around environmental, social and governance (ESG) issues has been elevated. The stark reality of climate risk, the coinciding shift in values of younger generations and the response from the providers of capital have become a long-overdue wake-up call for companies to act and join the conversation.
Change and action at the corporate level are an inevitability. In this edition of Executive Pay Memo, we highlight some of the key driving forces behind this change and set out how, as a human capital professional, you can help your organisation drive this agenda forward.
An unavoidable truth
There is no side-stepping the fact that companies are/will be incorporating ESG into their strategy — consumers, investors and employees are demanding it.
- 92% of consumers are more likely to trust a company that supports social or environmental issues.
- 88% of consumers are likely to be more loyal to such companies1.
- 68% of investors have integrated ESG into their investment decision-making2 and will increasingly vote against organisations which fail to adequately address the issue.
- 58% of employees consider a company’s social and environmental commitments when deciding where to work.
- 55% of employees would choose to work for a socially responsible company, even if the salary offered was lower1.
Along with the inherent benefits that come with the backing of these key stakeholders, evidence suggests there are further performance-related benefits of having a strong ESG profile.
Yet, whilst action driven by disclosure regulation and investor pressure is inevitable, the degree to which companies embrace their ESG agenda will vary — from ‘box tickers' to those that fully embed ESG within the DNA of their organisation. This is where you come in.
The pivotal role of you and your people
In our view, your people are both the advocates and the enablers of the sustainable change needed to drive your company's ESG strategy forward. We strongly advise that you consider now the best, most effective ways to engage, consult, motivate, incentivise, reorganise, reskill and ultimately, empower your people to make ESG part of your organisation’s DNA.
Below we outline four broad ways in which you, as human capital professionals, can start to materially turn the dial and help your company lead the way.
Why?
- We always advocate a business-first approach to executive remuneration design so that company strategy (and ESG focus) is meaningfully embedded within the executive remuneration framework to ensure alignment of required behaviours. We are already working with many companies who are leading the way in the ESG space at company level to mitigate the (often significant) current disconnect between ESG strategy and executive remuneration strategy.
- With strong, and growing, guidance from influential stakeholders, including ISS, Glass Lewis and the World Economic Forum, all major companies will have to reflect ESG in their executive compensation approach sooner rather than later — so be proactive and take the opportunity to get ahead of the crowd.
How?
- 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. This could also include using ESG measures as gateways/modifiers or introducing separate (hyper-long-term) incentive plans. The most appropriate way of reflecting ESG will depend on the strategic focus and culture of your company.
Why?
- We know that the workforce of today is looking to be inspired by a strong sense of purpose in an inclusive environment; we also know that companies with highly engaged employees are more likely to significantly outperform their industry peers in terms of growth in gross profit by 5% and growth in total assets by 7%.4
- Whether it’s airline pilots choosing the most fuel-efficient flight patterns or office staff simply recycling their waste, your employees are the day-to-day implementers of your sustainability strategy.
- Engaging employees around sustainability issues has been shown to strengthen company competitive advantage, financial performance and reputation.
How?
- Senior leadership support for ESG needs to be seen in action as well as words.
- Check if your culture supports your ESG goals. Targeted employee surveys (such as the Willis Towers Watson Pro-environmental Culture Index) or virtual focus groups reveal the degree to which your culture will help or hinder sustainable behaviour.
- Create a consistent and compelling narrative around your ESG activity. Link it to your purpose, and share stories of employees who have reduced their environmental impact or embedded sustainable principles into how they do their daily work.
Why?
- Do you have the skills, jobs and knowledge you need in your workforce to implement your company's ESG strategy (e.g. to manage environmental impact or to plan for a carbon-neutral future)?
- With whom does the responsibility lie at executive level? We are seeing a growing number of roles such as Chief Sustainability Officer and Chief Environmental Officer, which speaks to the governance aspect of ESG, with a formalised structure of accountability being created throughout many organisations.
How?
- Consider how roles will need to change in order to meet the requirements of your ESG strategy. Which jobs will become more critical, which will need to change and which may no longer be needed? What skills will be needed in future and how can you start to incubate them now?
- Technology will be a huge part of the journey to better environmental stewardship and will enable you to automate some roles and augment performance in others. You will need to reconstruct jobs and reskill employees to facilitate the changes your company will need to make. Use this opportunity to review what work is done, where, how and by whom, through the lens of your ESG strategy.
Why?
- Setting the tone from the top in terms of reward and incentivisation in isolation is unlikely to be sufficient. Consideration should be given to ensuring that the wider workforce is also incentivised to do the right thing and that the organisation’s ESG vision is incorporated in its total rewards offering.
How?
- Consider a review of your total rewards strategy, benefits and sales incentives. For example, could there be flexibility for employees to invest their pension in ESG funds — could you offer additional benefits for employees who use sustainable modes of transport to get to work or to meetings, and should there be an ESG underpin to the group-wide bonus plan?
- Does your on-boarding programme appropriately educate new joiners on the organisation’s ESG vision?
- Does your performance management system encourage managers to set ESG-related goals for their teams?
Our point of view
As demonstrated in multiple ways through the pandemic, the companies that truly embrace their ESG strategy and meaningfully embed it into the foundations and culture of their organisation, are those that reap the rewards of greater employee engagement and, ultimately, improved financial success. While all listed companies will have to act to some extent in response to disclosure regulation and investor community pressure, those that will thrive are those that lead the way in the ESG journey and make the transition happen from the inside out, not the outside in.
We urge you not to overlook the impact and value of your people, or of your role in mobilising and engaging them.
Footnotes
1. Cone Communications Employee Engagement Study and CSR Study.
2. State Street Global Advisors’ ESG Institutional Investor Survey.
3. Morningstar, How Did ESG Indexes Fare During the First Quarter Sell-off? article.
4. Willis Towers Watson, The Power of Three: Taking Engagement to New Heights article.
Contacts
