There is a growing focus on the quality of environmental, social and governance (ESG) and sustainability incentive metrics as prevalence levels of these metrics have started to reach a plateau, according to the results of a recent WTW global study.
Additionally, our study with several major investment firms reinforced the importance for companies to disclose necessary information for them to have confidence in the quality of ESG and sustainability metrics. This information can be characterized by three key interconnected principles detailed in this paper:
These principles, which were shaped by our engagement with investment firms and board directors, serve as the foundation for our research. Table 1 summarizes our view of what constitutes high-quality ESG and sustainability metrics. For simplicity, we will refer to these as “ESG metrics” in the rest of this article.
| Principle | Definition | What makes a high-quality ESG metric? |
|---|---|---|
| Strategic materiality | Metric reflects sustainability issues that are key to the business strategy, long-term resilience and shareholder value. | Alignment with materiality assessment, for example, ESG factor captured by incentive metric is in the top right quadrant of materiality assessment matrix (if available) Alignment with business and sustainability strategic priorities Alignment of climate metric targets with climate transition plans and the net-zero pathway |
| Measurability | Metric and the performance against it can be individually measured with an individual weight assigned and specific targets, and is quantifiable to the extent possible. | Metrics with individual weighting Targets that are numerically quantitative or well-defined qualitative Metrics that are widely recognized standard and comparable (albeit this might be balanced with strategic materiality considerations). |
| Transparency | Disclosures enable stakeholders to assess the alignment of ESG incentives with the shareholder experience and long-term value creation. | Disclosure of distinct goals: threshold, target and maximum Prospective disclosure of targets Disclosure of actual performance and achievement for individual ESG metrics (e.g., clear pay-for-performance disclosure) |
While these principles will not be new to compensation professionals, as they reflect broad expectations for any incentive metric design, we believe they are important to reinforce in the context of ESG metrics given their unique challenges such as imperfect data and political sensitivities. To illustrate best practices and provide actionable insights for boards and rewards professionals, we conducted a study to understand how companies are disclosing details of their ESG metrics that would be meaningful to investors.
We assessed the ESG metrics of 22 companies, using the following filtering criteria to ensure that the sample reflected a range of companies and those that were likely to have more advanced governance and disclosure practices around executive compensation and sustainability matters (Figure 1).
Adjustments also were made to ensure a reasonable balance in listing locations. The list of companies is included at the end of this article. The data summarized here are based on annual reports and proxy statements published in 2024. Changes announced by these companies in 2025 are not reflected in this analysis.
The alignment of ESG metrics with a company's overall business objectives is fundamental to the function of executive incentive metrics and for driving long-term value creation. We evaluated the strategic materiality of the ESG metrics based on rationale provided in the remuneration report for metric selection, as well as assessed the metrics’ alignment with the results of the company’s ESG materiality assessments (where they exist), business and sustainability strategic priorities and climate transition plans.
A key objective of materiality assessments is to identify which ESG issues are most material to the company and, as such, may serve as a helpful starting point for selecting strategically material ESG metrics. Just over one-third of the companies reviewed have currently published materiality assessments (influenced by disclosure requirements relevant to those companies, such as the Corporate Sustainability Reporting Directive (CSRD)). Of those (eight in total), there is a mix of practices, with three companies aligning all ESG metrics to areas that were identified as material for the company through this exercise.
All five of Nestle’s ESG metrics in the annual bonus and one in the long-term incentive (LTI) plan (total of six) are aligned to the ESG factors in the top quadrant of their materiality assessment matrix. This means that these issues are material to the business financially and in terms of Nestle’s potential outward impact. Both Walgreen Boot Alliance and Elevance Health only have one ESG metric that reflects health equity as an aspect of ESG that was identified to be material to their business strategies/models.
As materiality assessments become more of a standard feature in disclosures, companies can enhance the selection of any ESG metrics by better aligning them to the results of their materiality assessment results and indicating the connection in their remuneration report.
From reviewing annual sustainability and remuneration reports, we found examples where the sampled companies demonstrated the strategic materiality of their ESG metrics well.
Of the eight companies that have carbon/greenhouse gas emissions reduction as an incentive metric, seven explicitly state their alignment with the net-zero pathway within their climate transition plan. Examples include HSBC and Total Energies.
In ensuring strategic materiality of the ESG metric, companies must first identify the ESG areas that are most impactful to the company's long-term performance and resilience. They must then clearly illustrate why, in that context, a given metric was selected to give stakeholders confidence that the metric is not merely symbolic but genuinely material to the business. The importance of this principle is emphasized as political sentiments around sustainability become increasingly polarizing and challenging for global companies to navigate.
For ESG metrics to effectively drive executive behavior in line with long-term value creation, they must be clearly defined and measurable. To assess measurability, we focused on three key elements: individual weightings, target setting and comparability.
A necessary aspect of ensuring measurability is assigning individual weight to each ESG metric. Half of the companies researched have disclosed an individual weight to all metrics, of which a vast majority (80%) have assigned at least a 5% weighting to individual metrics in their annual bonus and LTI plans. The weight assigned by companies should be material enough to drive the desired focus and performance against the metric.
Around one-third (31%) of the companies opted to aggregate multiple ESG metrics into a single scorecard, without individual weightings assigned for each measure. While the intent may be to address a broader range of ESG issues, such an approach dilutes focus on the most strategically material metrics and lacks measurability because individual metrics within the scorecard are not independently measured.
Some companies leverage incentive mechanics such as modifier or underpin, which in some cases may not affect payout enough to drive actual ESG performance. However, companies such as AstraZeneca and Mercedes-Benz have used ESG modifiers in their annual bonus in conjunction with more material ESG metrics in LTI. This approach can enhance measurability if designed well, as the modifier provides a structured adjustment mechanism to annual bonus and means that ESG performance can have a defined impact on payouts. This, combined with material ESG metrics in the LTI plan reinforces the long-term materiality and measurable link to incentive outcomes.
Clear and quantifiable targets are essential to ensuring that ESG metrics are measurable. Of the companies that have disclosed their targets, all of them have numerically quantitative or well-defined qualitative targets for all ESG metrics used. Disclosure of targets is addressed in more detail in the “Transparency” section of this article.
Using commonly defined metrics to compare ESG performance against peers is another facet of measurability. In our assessment, 45% of the companies selected widely established metrics (e.g., carbon emissions reduction, employee engagement). These metrics provide external validation and allow investors to assess targets and performance within a broader industry context. However, while company-specific metrics may be inherently less comparable, they can be valuable when aligned with unique business strategies. For instance, Nestlé uses a combination of established metrics like carbon reduction alongside company-specific goals related to affordable nutrition with micro-nutrients.
While comparability with peers can be helpful for measurability and external validation, companies should be mindful that strategic materiality may require the use of more tailored metrics. Key to navigating this challenge is to clearly disclose the rationale for selecting these metrics, which ties directly to the third principle: transparency.
Transparency is essential for fostering trust by ensuring that stakeholders can accurately assess the alignment of ESG metrics with long-term strategy and have confidence in the pay-for-performance link. This includes clear disclosures on the rationale for metric selection (covered under the first principle, strategic materiality), the targets set, and the actual performance against those targets for each metric.
Among the companies assessed, 64% have disclosed clear retrospective targets for short-term incentive (STI) and/or LTI plans. The remaining 36% did not disclose targets for any ESG metrics.
Among those companies that disclosed their STI and/or LTI targets, all but two also disclosed their threshold and maximum goal levels, allowing stakeholders to understand the level of performance required for the full incentive payout range. This practice instills confidence in the governance of executive pay outcomes relating to ESG metrics. Mercedes-Benz and UnitedHealth are examples of companies that provide clear disclosure of their targets for all ESG metrics, including carbon reduction, employee and customer experience, with defined thresholds and maximum levels.
Within the peer group, only 18% of the companies prospectively disclosed targets for their LTI ESG metrics (i.e., disclosure of targets for a forthcoming performance period). No companies prospectively disclosed targets for their STI ESG metrics.
The four companies that provided prospective disclosure are from the UK, where there are more stringent disclosure requirements compared to other markets. Companies often refrain from providing prospective disclosure of targets due to concerns over commercial sensitivity. However, from our recent engagement with investors on this topic, we know investors are largely unsympathetic to this argument as they believe that most ESG metrics and targets are not commercially sensitive.
Disclosure of actual performance relative to targets and associated payouts is key to demonstrating a clear pay-for-performance link, and that ESG metrics are not just implemented to smooth payouts, as some external stakeholders can be skeptical about. Only 31% of companies disclose both the actual performance relating to the ESG metrics and the achievement of those relating to targets (the payout of the individual metrics). HSBC and BP are examples.
The investment community expects transparency to gain confidence in the robustness of ESG metrics. However, this shouldn’t be viewed only as a way to please investors. Robust disclosures can help boards articulate to external stakeholders how the selected ESG metrics drive long-term sustainable value creation for the business.
Our analysis had two primary objectives:
Even among the world’s largest global companies, there are ways to implement ESG metrics more effectively. Companies that prioritize the strategic alignment of their ESG metrics, ensure clear and measurable targets, and provide transparent disclosure will be best positioned to meet stakeholders’ expectations and sustain trust with investors who increasingly scrutinize the quality of these metrics.
