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Should incentive plans include ESG goals?

Incentive is a powerful tool. Nevertheless, while some board members tend to agree that it is increasingly possible to identify quantifiable and measurable ESG metrics, they question whether a simple set of key performance indicators suffice to cover a topic of such breadth. Most find it challenging to narrow down the discussion on suitable ESG metrics out of hundreds of options.

That said, there is a consensus that companies should not incorporate ESG metrics for the sake of «checking the box» but should instead identify ones that truly drive long-term sustainable value creation in the company’s context. Compensation committee members, in particular, expect management and the full board to set out an ESG framework [1] in the hope of keeping a narrow focus on how they hold management accountable to a manageable set of ESG metrics. Despite worldwide efforts to standardize ESG disclosures and long-standing environmental metrics, such as greenhouse gas emission, lack of standardization and comparability remains a source of frustration for board members.

How ESG metrics are incorporated into executive incentive plans today may seem to contradict the notion that ESG investment drives long-term sustainable financial and market performance. A 2020 research from Willis Towers Watson [2] shows that 98% of the S&P 500 that use ESG incentive metrics incorporate them into the annual, not long-term, incentive plan. Among top European companies, ESG metrics are also more often included in annual incentive plans. While including ESG metrics in long-term incentive plans is more prevalent in Europe than in the US, board members are generally not surprised by this data point, attributing this tendency to the difficulty in setting fair ESG goals for longer periods in light of how quickly the ESG dialogue is progressing.

Most agree that these annual ESG goals should be informed by and build toward a longer-term ESG agenda. At stratESGy we also believe that to build a coherent sustainability strategy and its narrative the ESG dots have to be connected.

[1] Example of stratESGy framework:


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