Global events such as the pandemic, economic uncertainties and social and racial injustice have prompted companies worldwide to maintain or accelerate changes to their environmental, social and governance (ESG) priorities.
This is according to a survey of boards of directors by Willis Towers Watson, which found that 78% are planning to change how they use ESG with their executive incentive plans over the next three years.
“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.”
More than four in 10 (41%) plan to introduce ESG measures into their long-term incentive plans over the next three years, while 37% plan to introduce ESG measures into their annual incentive plans. Additionally, about a third plan to raise the prominence of environmental and social/employee measures in their incentive plans.
Among the greatest challenges with ESG measures cited by respondents are target setting (52%), performance measure identification (48%) and performance measure definition (47%).
In North America, nearly three-quarters of respondents (73%) have implemented at least one initiative to promote diversity and inclusion at their organizations with another quarter planning or considering doing so. About four in 10 companies (43%) have conducted a pay equity analysis. Just under half (46%) have established or have supported internal diversity and inclusion networks, and another 32% are planning or considering doing so. And 44% have increased their communication of policies and benefits that promote an inclusive culture.
Employers are also taking various measures to review their workforces through an ESG lens. Nearly half (46%) said they have deployed listening strategies to engage with their employees, while three in 10 have created a new executive role to drive ESG strategy and have identified new positions in their organizations to help achieve their ESG strategy. Nearly half of respondents are either planning to review their culture to ensure ESG is embedded throughout their organizations or are considering doing so in the future. In addition to culture, about one in five respondents are expected to add board and/or compensation committee oversight of well-being and fair pay within the next three years.
Overall, while most companies are developing ESG implementation plans (84%) or have identified ESG priorities (81%), less than half (48%) have incorporated ESG plans into all aspects of their businesses — strategy, operations, and products and services offerings, indicating that companies are on different parts of their ESG journey. Over half (53%) are accelerating their ESG priorities and timing. More than three in four respondents (78%) believe ESG is a key contributor to stronger financial performance.
“Although companies are revising their use of ESG measures to support their executive pay programs, it appears more work needs to be done,” said Ryan Resch, managing director, executive compensation, Willis Towers Watson. “Boards have been asking for more information on ESG strategies and priorities, particularly in the areas of the environment and employee diversity, to understand their alignment to sustainable value creation and materiality. Their goal is to support the identification of the right measures for their incentive plans with appropriate performance targets.”