The rise of ESG-linked incentives in European banking

In 2025, the inclusion of environmental, social, and governance (ESG) metrics in executive compensation has become the norm in European banking. But while prevalence has peaked, the real test now begins: are these metrics meaningful, measurable, and actually driving the right outcomes?

Drawing from our latest global research and direct client experience at WTW, this article explores how ESG metrics are being used across the UK and the Eurozone in long-term incentive plans (LTIs). We analyse these regions separately due to their distinct regulatory frameworks, investor cultures, and governance expectations — differences that shape how ESG-linked pay is approached and assessed. We highlight emerging best practices, investor expectations, and how remuneration committees can calibrate ESG metrics for maximum strategic value — avoiding the increasingly visible traps of greenwashing, weak links, and poor design.

From adoption to accountability

Our latest research shows that over 90% of European listed companies now include ESG metrics in executive pay plans — far ahead of other regions. Banks, once cautious adopters, are now at the forefront, particularly in integrating climate and diversity metrics into LTIs. Yet, we're seeing a critical pivot: it's no longer about whether ESG metrics are included, but how well they are calibrated and linked to genuine performance in strategically important areas.

In Europe, nearly 70% of companies now use quantitative ESG metrics, but pressure from investors and proxy advisors is intensifying. It's no longer enough to simply include ESG labels. Investors are looking for outcome-based targets — goals that are material to strategy, challenging to achieve, and clearly tied to payout outcomes.

United Kingdom: Evolving with investor expectations

UK banks have taken significant steps to integrate ESG more effectively into executive pay, moving away from symbolic inclusions and toward structured, long-term metrics. This evolution has been shaped by years of investor engagement and shifting governance norms. The transition is now marked by growing consistency in the use of ESG criteria within LTIs, a more targeted focus on materiality, and deeper internal collaboration between HR, sustainability, and risk teams. Across the board, there's a push to make ESG metrics more than performative — they're becoming strategic levers that influence both reputation and results.

Key observed trends:

• Shift from short-term to long-term ESG metrics, especially in LTI plans
• Greater investor scrutiny of calibration, target ambition and disclosure
• Emphasis on materiality, with metrics expected to reflect the bank's core sustainability strategy

Examples in the UK include banks like Barclays and NatWest integrating ESG into LTIs with double-digit weightings, reflecting clear links to strategic priorities such as decarbonization or inclusive leadership. HSBC has recalibrated the structure of its ESG targets following investor feedback, shifting weightings and refining disclosures. Lloyds Banking Group, meanwhile, has included customer satisfaction and gender diversity outcomes in annual incentive plans, and is increasingly incorporating sustainability into longer-term performance metrics.

Eurozone: Leading on regulation and calibration

In the Eurozone, ESG metrics in executive pay are now deeply embedded, underpinned by strong regulatory signals and evolving market expectations. The EBA's 2025 Guidelines on ESG Risk Management and national corporate governance codes have helped establish ESG performance criteria as a standard — not an innovation.

The key trend across Eurozone markets is a multi-year maturation of ESG integration, moving from policy compliance to strategic alignment. Banks have shifted their focus from simply adding ESG KPIs to ensuring those metrics reflect their core risk frameworks, strategic priorities, and stakeholder expectations. There is also a clear regional emphasis on climate risk and sustainable finance metrics, given the EU's broader climate goals and regulatory architecture (including CSRD and SFDR). ESG performance is now routinely linked to both financial and reputational risk management.

Key observed trends:

• Wide adoption of ESG performance criteria in variable frameworks
• Focus on climate-linked targets, aligned with EU regulatory and policy initiatives
• Stronger board accountability and transparency, especially in ESG goal calibration and disclosure

Examples from leading Eurozone institutions illustrate this shift: BNP Paribas and Deutsche Bank have made ESG targets a central part of their CEO and top executive LTI scorecards, linking them to decarbonization plans and social impact objectives. ING applies ESG modifiers in both STI and LTI contexts, focusing on sustainable finance volumes, conduct, and employee engagement. Société Générale provides detailed disclosures in its remuneration report, outlining ESG target weightings, achievement bands, and actual outcomes, reinforcing accountability.

Best practices: Calibrating ESG metrics effectively

While the UK and Eurozone differ in regulatory emphasis, investor pressure, and governance culture, our work across both regions reveals a striking degree of convergence in what "good" looks like. UK banks tend to lead on investor dialogue and transparency, while Eurozone institutions have embedded ESG more structurally through regulation. Yet the most effective practices — grounded in materiality, measurability, and accountability — are increasingly shared across borders.

Based on our advisory work and global survey data, we see seven consistent features in the most effective ESG-linked incentive designs — those that not only satisfy investor and regulatory expectations but genuinely support sustainable performance and long-term value creation. These features reflect a convergence of design maturity, strategic alignment, and market-tested effectiveness across Europe's leading banking institutions:

Investor and proxy advisor expectations

Across both the UK and the Eurozone, proxy advisors and institutional investors have taken an increasingly sophisticated stance on ESG-linked pay. In 2024 and 2025, both ISS and Glass Lewis sharpened their expectations, moving beyond the mere presence of ESG targets to focus on the rigour, transparency, and strategic relevance of those metrics.

In the UK, this scrutiny has encouraged a shift from ESG metrics in annual bonus plans to longer-term incentives, where the impact can be assessed over a more meaningful horizon. Investors now expect ESG targets to be clearly defined, measurable, and directly tied to a bank's core sustainability priorities — with poor calibration or vague formulations often resulting in negative vote recommendations.

In the Eurozone, proxy advisors remain broadly supportive of ESG-linked pay, but with an increasing insistence on science-based climate targets and avoidance of superficial 'overlay' metrics. Glass Lewis, for instance, has flagged ESG structures that appear disconnected from performance or lack transparent scoring mechanisms.

What's clear is that RemCos can no longer afford to treat ESG metrics as cosmetic. Across jurisdictions, the expectation is converging: link pay to ESG with intent, or risk losing investor confidence.

Common pitfalls to avoid

Despite progress, many banks still face traps that reduce the credibility and impact of ESG metrics:

• Greenwashing targets: Easy-to-achieve or cosmetic goals ("issue sustainability report") that don't move the needle
• Opaque metrics: ESG is "considered" but not tied to defined payout outcomes (e.g. referencing diversity or climate goals in bonus criteria without any clear KPIs)
• Overconcentration: One-dimensional ESG metrics without balance (e.g. only E, no S/G)
• Leniency bias: ESG metrics consistently pay out above target — a sign of under-calibration
• No downside linkage: Poor ESG performance (e.g. compliance failures) has no effect on incentives

Our data shows that qualitative ESG targets pay out at 116% of target on average, while quantitative targets average 111% — an indicator that objective metrics remain for the moment perhaps better calibrated and more defensible.

Looking ahead: From metrics to meaning

At WTW, we work with leading banks across Europe to design ESG-linked pay structures that deliver impact, withstand scrutiny, and align with long-term business goals. Whether you're looking to embed science-based climate targets into LTIs or fine-tune DEI scorecards to reflect meaningful cultural progress, our team can support your board in turning ESG intentions into accountable action.

The focus for 2025 and beyond is sharpening: purpose, calibration, and disclosure. For banks, the challenge is to move from generic ESG language to tailored, strategic incentive designs that support long-term value and risk management.

These aren't just theoretical upsides. Evidence from a multi-year study of 127 European and U.S. banks (Abu-Ali, Al-Jamal & El-Masry, 2024) suggests that linking executive pay to ESG metrics is positively associated with higher sustainability ratings and modest but measurable financial benefits — including a 2–4% improvement in return on assets (ROA) over time. The study also indicates that ESG acts as a mediating factor between pay structures and bank profitability, particularly when targets are strategically aligned and well-disclosed. Supporting this, research on Eurozone institutions (Yusupov, 2024) shows that banks with strong ESG integration — especially in remuneration and governance — tend to be more financially stable and less volatile, reinforcing the value of thoughtful ESG calibration.

Done well, ESG-linked incentives can:

• Reinforce a bank's sustainability commitments
• Drive executive accountability on climate and inclusion
• Demonstrate to investors a culture of performance with purpose
• Support higher long-term profitability and value creation through better alignment of leadership behaviour with business risk and opportunity

Done poorly, they can erode trust and invite public or proxy backlash.

European banks that treat ESG metrics not as a signal — but as a strategy — will be the ones that lead the sector into a more sustainable, resilient, and trusted future.

And for those still hesitating? ESG-linked pay isn't a silver bullet — but done well, it's close. When ESG targets are thoughtfully chosen, credibly calibrated and transparently disclosed, they don't just check boxes — they set direction. They give the RemCo a firmer grip on performance, investors a clearer view of alignment, and executives a stronger case at payout time. And if along the way you manage to please the proxy advisors, anchor long-term strategy, and reduce shareholder grumbling? Then congratulations — you've done something truly rare. You've turned ESG from a reputational risk into a reputational win.

At WTW, we go beyond the theory. Our teams support banks in designing, testing and implementing ESG metrics that reflect the organisation's strategy, satisfy investor scrutiny, and drive lasting value. Whether you're refining your approach or starting from scratch, we can help translate insight into action — and turn your ESG commitments into a credible, high-performance incentive framework.

Now that's an incentive worth investing in.