The adoption of environmental, social and governance (ESG) measures in executive incentive plans continues to increase across all markets, including North America, according to a new global study from WTW (NASDAQ: WTW), a leading global advisory, brokerage and solutions company. The number of U.S. publicly traded companies doing so continues to grow, and similar trends are emerging among companies in Canada, Europe and Asia-Pacific, the study found.
In the US, more than three in four S&P 500 companies (76%) reported in this year’s proxies that they have included at least one ESG measure in their executive incentive plans, up from 69% the previous year and just 52% three years ago. While growth is occurring in both the short-term incentive (STI) and long-term incentive (LTI) plans, most of the growth is in the STI plans. In Canada, four in five TSX 60 companies reported using at least one ESG measure in their executive incentive plans, up from 68% three years ago. While ESG metrics are still much more widely used in STI plans, the prevalence of ESG metrics in LTI plans has nearly quadrupled over the past three years.
“Corporate interest in linking executive incentive plans to ESG measures shows no signs of abating.” – Robert Newbury | senior director of the Global Executive Compensation Analysis Team, WTW
Human capital measures remain the most popular across all ESG categories, used by 70% of S&P 500 companies and 75% of TSX 60 companies. Environmental metrics saw a significant increase in adoption for both markets. Over the past three years, the use of environmental metrics has increased from 12% to 44% in the US and from 27% to 50% in Canada. Within the environmental category, the reduction of CO2 emissions is by far the most common measure.
“Corporate interest in linking executive incentive plans to ESG measures shows no signs of abating.said Robert Newbury, senior director of the Global Executive Compensation Analysis Team, WTW. “In fact, we see smaller industry differences in the use of ESG metrics as we see increased adoption in the IT and consumer goods industries. The continued growth we are seeing reflects the continued focus of companies across markets and countries to clarify how ESG priorities are embedded in their business strategy and how they are viewed as a key measure of non-financial performance.”
WTW’s research also included 328 companies across nine major indices in Europe, as well as 264 companies across seven major markets in the Asia-Pacific region.
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Key findings from these companies include:
- The prevalence of ESG metrics within executive incentive plans continues to rise in Europe and Asia Pacific, from 90% to 93% and from 63% to 77%, respectively.
- In Europe, the use of ESG measures in LTI plans is common. The majority of European companies now include ESG metrics in their LTI plans, especially in the areas of environment and climate. This represents an increase of 35 percentage points from 21% to 56% over the past three years.
- While Europe is ahead of North America in its emphasis on environmental and climate areas, human capital metrics remain a top priority. In Europe, more than 80% of companies use at least one human capital measure in their executive incentive plans.
“We continue to see pressure from institutional investors to articulate how ESG and sustainability priorities drive sustainable value creation over the long term. Meanwhile, North American companies are also seeing increased regulatory pressure on ESG-related disclosures. We expect greater emphasis on identifying and measuring individual ESG elements that have the greatest impact on companies.said Ken Kuk, senior director of Executive Compensation and Board Advisory, WTW.