The energy sector tops the list of industries focused on ESG-based incentives, according to Semler Brossy’s new report. The report notes that ESG metrics in incentive plans should align with key business priorities and metrics should be material to achieving strategic goals in light of overall industry risk factors.
The study, second in a series of surveys looking at ESG and metrics among S&P 500 firms, breaks down the prevalence of metrics by industry. Within the S&P 500, 65% of companies have at least one human capital management metric, most commonly DEI, across all industries. 23% include at least one environmental metric, with 41% having an operational metric which could range from community engagement to product quality.
Industries with the most prevalent use of ESG metrics in incentive plans are Energy (100%), Utilities (96%) and Materials/Real Estate (86%).
- Energy, Utilities and Materials companies have the highest use of environmental metrics, largely because of the direct impact of climate on their operations and the growing focus on renewable and alternative energy. Carbon footprint, emissions/chemical containment and energy efficiency metrics are the most frequently cited. While there is limited use of these environmental metrics outside these industries, carbon footprint is now included as a metric across all 11 industries reported and there is increasing focus on plastic consumption and waste reduction objectives across the board.
- Faced with significant talent challenges over the past several years, given their reliance on intellectual human capital and customer orientation, the Financial and Real Estate sectors most commonly include HCM metrics, with the largest year-over-year growth. Information Technology lags Financial and Real Estate in HCM metrics, likely due to the preponderance of early-stage companies that focus less on ESG. Safety is also a common metric adopted across industry groupings.
- Many sectors include “other” metrics that are highly correlated with business priorities. Customer satisfaction is used by 93% of the Utilities industry driven by the importance of service levels and the highly regulated environment. Community engagement is the highest prevalent for Financial Services firms where there is an emphasis to “give back” to the communities in which they invest. And product quality is often used in Information Technology companies as they strive to deliver high-quality products despite aggressive development cycles.
- While the Consumer Discretionary industry, somewhat surprisingly, has the lowest prevalence of ESG metrics (30%), there was a significant jump from last year (+74%).
The report advises “a degree of caution in adopting incentive plan metrics purely due to pressure from investors or peer practices” and suggests that the most appropriate ESG metrics should be considered from a business and multi-stakeholder perspective.