2020 ESG survey of board members and senior executives

About the survey

Research findings from the 2020 Board of Directors Survey: Alignment of ESG with Executive Incentives and Human Capital Governance are based on 168 respondents, including executive and non-executive board members and senior executives, representing organizations that employ 2.2 million employees globally.

Respondent profile:

• 71% for profit, publicly traded
• 24% for profit, private
• 3% nonprofit or government
• 2% other

This image shows the respondents by industry:

• 13% energy and utilities
• 17% financial services
• 20% general services
• 5% health care
• 6% IT and telecom
• 29% manufacturing
• 3% public sector and education
• 7% wholesale and retail

Respondents by role

Respondents by industry

Overview

Current events put spotlight on human capital and ESG initiatives

Many organizations are implementing, even accelerating, plans on environmental, social and governance (ESG) issues, taking actions to review workforce initiatives through an ESG lens and including ESG in their executive incentive plans. While the most cited reason for taking these actions is because they see it as the right thing to do, over three-quarters (78%) of respondents indicate that they believe ESG is a key contributor to strong financial performance. As a result, many report that their boards are likely to place attention on effective governance and oversight of human capital issues linked to employee wellbeing, culture, gender pay gaps and fair pay. Still, most organizations have not yet incorporated ESG plans into all aspects of the organization.

To understand how and why boards are factoring ESG measures into executive compensation and human capital strategies, we fielded the 2020 Board of Directors Survey: Alignment of ESG with Executive Incentives and Human Capital Governance.

Organizations are at different stages in their ESG journey

ESG priorities are shaped by several factors, including most commonly the desire to increase their organizations’ long-term value (79%), moral and ethical reasons (80%) and alignment with the business strategy (74%). While findings reveal that most employers are developing ESG implementation plans (84%) and have identified ESG priorities (81%), just about half (48%) have incorporated these plans into/across all aspects of the organization — business strategy, operations, and product and service offerings.

Around half (54%) of respondents said that current issues (e.g., the pandemic, recession, social and racial justice, income inequality) have changed their ESG priorities and/or accelerated their timing. Almost no one indicated that these events have slowed down their timing. Amidst all this activity, when it comes to embedding the priorities into strategy and operational processes, half of respondents think they are merely on par with their peers, with another one in eight considering themselves lagging behind.

Forty-one percent of respondents rank environment as their leading ESG priority now; 43% anticipate it will remain number one in 3 years. Among other primary ESG priority areas are a continued focus on employees and governance, with 19% and 21% of employers respectively ranking these as their top ESG priorities now; around the same percentages anticipate these remain top priorities in 3 years (22% and 18% respectively).

Incorporating ESG into executive incentives grows more critical

Most respondents are likely to include ESG measures in their annual incentive plans. For overall performance assessments, 63% have already factored ESG into annual/short-term incentives and 41% have done so for long-term incentives. The survey found the most common challenges cited for using ESG metrics here are setting targets (52%) and the identification (48%) and definition (47%) of ESG performance metrics.

Nearly two-thirds (65%) of respondents are planning to change their use of ESG priorities in executive incentive plans over the next year; an even higher number, nearly four out of five (78%), plan to do so over the next 3 years. Twenty-two percent say they will introduce ESG measures into long-term incentive plans in the coming year; that number jumps significantly to 41% that will do so within three years. Nearly a third are looking to increase the prominence of environment measures in the next year to 3 years. Around the same percentages of respondents, over the same time period, also plan to increase the prominence of employee measures.

Some are making connections to inclusion and diversity

Board and executive commitment to overseeing human capital management — investing in employees, providing fair compensation, promoting an inclusive culture — can play a crucial role in the economic value of an enterprise. In North America, boards are asking for more information, more frequently, on inclusion and diversity (I&D). While most North America respondents consider ensuring I&D and equity to be a shared responsibility within an organization, 57% see the board as ultimately responsible.

The focus on human capital at the board level may be a key driver behind the push for greater integration of ESG into business practices.

“With institutional investor interest in ESG and sustainable investing increasing, companies are maintaining or accelerating their focus on ESG initiatives,” said Shai Ganu, global head, Executive Compensation, at Willis Towers Watson. “We know from our research and consulting that companies’ focus is on a stronger alignment of executive compensation plans and ESG priorities, particularly with climate change and environmental measures, inclusion and diversity matters, and overall human capital governance.”

“

Companies are focusing on aligning executive compensation and ESG priorities, particularly with environmental measures, I&D matters and human capital governance.”

Shai Ganu | Global Head, Executive Compensation, Willis Towers Watson

Highlights and trends

ESG priorities are shaped by several factors, including moral and ethical values, business strategy and performance, public perception, risk mitigation and brand reputation.

• While most respondents (84%) are currently implementing ESG plans, just under half (48%) have incorporated plans into all aspects of their business: strategy, operations, and product and service offerings.
• The most common factors influencing ESG priorities are moral, ethical reasons (80%), increasing long-term organization value (79%) and alignment with business strategy (74%).
• 41% of organizations ranked environment as the number one ESG priority area now; 43% rank it number one over the next three years.
• Employee and governance factors remain part of the top 3 priority areas now and over the next three years.
• Four out of five (78%) respondents say ESG is a key contributor to organizational value or stronger financial performance.

Most respondents factor ESG into their incentive plans, with a focus on short-term over long-term incentives.

• Nearly two-thirds (63%) of organizations factor ESG into executive annual/short-term incentive plans; significantly less, just 41%, factor ESG into their long-term incentives.
• Over half (51%) use ESG in individual performance scorecards for annual incentives versus 21% for long-term incentives. 
• Two out of three (65%) of respondents are planning to change how they use ESG in their executive incentive plans within 12 months (this jumps to nearly 80% doing so within 3 years)
• The most common changes in the next year are an increased prominence of environment (33%) and employee (33%) measures.
• 22% of companies will introduce ESG measures into long-term incentives in the next year; that percentage jumps to 41% doing so within 3 years.
• When incorporating ESG metrics into executive compensation plans, some of the most common challenges cited are setting targets (52%), identifying (48%) and defining (47%) performance metrics and defining time periods to affect meaningful change (35%).

Employers are taking various measures to view their workforce through an ESG lens.

• For ESG-related matters and oversight responsibilities, most respondents agree that their full board is most likely to focus on succession planning (77%), I&D (66%) and culture (65%).
• The top areas of primary oversight for compensation or remuneration committees include broad-based Total Rewards (60%), succession planning (60%) and fair/gender pay programs (55%).
• Nearly half (46%) of employers have deployed listening strategies to engage with their employees.
• Nearly one-third (30%) have created a new executive role to drive ESG strategy, with almost a quarter more (23%) planning or considering doing so. Nearly one-third (30%) have also identified new positions in their organizations to help achieve their ESG strategy.
• Half (50%) are already reviewing or planning to review their culture to ensure ESG is embedded throughout their organizations; over a quarter (27%) are considering doing so.

Boards in North America are asking for detailed information more frequently on I&D in order to help ensure that I&D and equity are a shared responsibility with the senior executive team.

• The majority of respondents (88%) agree that the CEO should be primarily accountable for ensuring I&D, equity and representation across the company, with 67% agreeing it should be monitored at the CHRO/management level; over half (57%) say the board is ultimately responsible.
• One in five (20%) employers have set hard diversity goals for senior management representation; another 49% are planning or considering doing so.
• Nearly three-quarters (73%) implemented at least one initiative to promote I&D at their organizations.
• Over half (51%) have conducted or will be conducting a pay equity analysis.
• 46% established internal I&D networks, with another 32% planning or considering doing so.
• 44% have increased communication of policies and benefits that promote an inclusive culture.
• Over a third (37%) are reevaluating their recruitment and promotion processes/succession plans; 44% are planning or considering doing so soon.

Footnote

* Data findings in this section are based on responses from North America.