LONDON, December 16, 2024 — As Environmental, Social and Governance (ESG) metrics have become a common feature in executive incentive plans, European companies focus on setting more robust metrics that are aligned to their business priorities, according to a new global study by WTW (NASDAQ: WTW), a leading global advisory, broking and solutions company. The annual study also revealed that prevalence of carbon/greenhouse gas (GHG) emissions reduction metrics remain high, some with the inclusion of scope 3 emissions , as companies across Europe have advanced defining their net-zero commitments, interim targets and transition plans driven by regulation and investor expectations.
Looking at companies across eight major indices in Europe, the study found that the vast majority (94%) reported that they incorporated at least one ESG metric in their executive incentive plans. The number of companies using ESG measures in short-term incentive (STI) has remained broadly stable at 88%, while the prevalence of these metrics in long-term incentive (LTI) plans has risen to 64%, representing a 7 percent point increase.
Globally, 81% of companies incorporated at least one ESG metric in their executive incentive plan, a moderate increase from the previous year. Over three quarters of global companies (77%) reported using ESG measures in their STI plans while 29% reported using ESG measures in their LTI plans.
The Social category continues to be the most prevalent (89%) in Europe, albeit followed closely by Environmental (85%). Within this, human capital metrics remain the most popular ESG metric category overall, used by 85% of companies in Europe and 76% globally. However, the most prevalent individual metric by far is carbon/GHG emissions reduction (66%) which is predominantly higher than any other region, globally. Interestingly, 37% of the companies with a carbon/GHG metric in their incentive plans include Scope 3 emissions in the definition.
“Despite challenges with scope 3 emissions data, target setting and influence, it’s encouraging to see companies incorporating scope 3 into their carbon/GHG emissions reduction incentive metrics to drive necessary focus on what is invariably the most material contribution to global emissions companies make” said Hannah Summers, Director of Stewardship and Sustainability, Executive Compensation and Board Advisory, WTW. “Market pressures, such as the CSRD’s requirement for Double Materiality Assessments, are forcing companies to better articulate which aspects of ESG are most material to their businesses, and which they have the biggest impact on. This can be a helpful exercise when it comes to selecting ESG metrics for incentive plans that are material to business strategy and long-term value creation, as well as being able to robustly define and set targets against them.”
“Market pressures, such as the CSRD’s requirement for Double Materiality Assessments, are forcing companies to better articulate which aspects of ESG are most material to their businesses, and which they have the biggest impact on.”
Hannah Summers | Director of Stewardship and Sustainability, Executive Compensation and Board Advisory, WTW
WTW’s study also found that among European companies, ESG and financial metrics have paid out at similar levels, although it reported a higher payout of qualitative ESG metrics compared to quantitative ESG metrics. This may validate investors’ concern around the level of rigour in target setting and performance assessment for qualitative and discretionary ESG metrics.
WTW’s study also included 500 companies in the United States, 60 companies in Canada, as well as 193 companies across seven major markets in the Asia Pacific region.
The key findings from those companies include the following:
“With the use of ESG measures in executive pay plans plateauing, we expect investors and Boards to focus on ESG metrics most material to the business and the quality of these metrics, ensuring that they are transparent, objective, measurable, and underpinned by a robust approach to target setting,” said Summers.
This research study reviews public disclosures from 1057 companies, consisting of those listed on the S&P 500, TSX 60 in Canada, eight major European indices, including the FTSE 100; and the largest companies across seven markets in the Asia Pacific region.
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