Global Trend Linking ESG Metrics to Executive Incentives

A new report by Willis Towers Watson shows 68% of companies in the U.S., Canada and Europe are now using ESG metrics in executive incentive plans. Employers continue to face pressure to act on key ESG issues globally as the evolving regulatory environment continues to push ESG issues such as greenhouse gas emission, gender pay gap disclosures and data privacy on to board agendas.

Europe and Canada out front: In Europe 79% of companies incorporate ESG metrics in their incentive plans, with 77% in Canada and 60% in the U.S. doing so, with most of the growth year over year in the U.S. and Canada. Additionally, Europe continues to lead the way on long-term ESG metrics, with 28% of European companies taking this approach versus 5% in the U.S. and 3% in Canada.

In Asia Pacific, integrating ESG metrics into incentive plans is less common as businesses are facing less pressure from investors and regulators. “Although companies are revising their use of ESG measures to support their executive pay programmes, it appears more work needs to be done. Some countries such as Singapore and Australia have already come a long way and can serve as models for other markets. Others like Japan are in close pursuit,” noted Trey Davis, WTW's executive compensation leader in the region.

Latin American companies are increasingly working to improve ESG standards established by the financial industry and government regulators. Commitments from local officials and governments to implement ESG policies attract investors focused on ESG to the region.

Outlook: The use of ESG metrics in executive compensation varies significantly around the globe depending on local culture and regulatory environment. However, in general, the global investment community is increasingly focused on ESG measures as a way to ensure companies' sustainability and long-term success.