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European companies are linking executive pay to ESG goals to drive change

Research suggests European companies are leading the way to greater accountability for ESG initiatives by linking results to executive pay. It’s an approach that could drive positive changes within businesses.

ESG stands for “environmental, social, and governance”. It’s a collective term for a business’s impact on the environment and society, as well as how it’s governed. An ESG strategy can demonstrate that a company is reducing risk and its harmful impact on the world, such as by reducing emissions that contribute to climate change.

From an investment perspective, investors might consider a company’s ESG standards or commitments alongside its finances when making an investment decision.

While plenty of companies report on their ESG strategies, it can be difficult to know how embedded they really are within a company. A firm might report that they’re aiming to halve carbon emissions by 2035 – but are they on track to reach that goal, and what steps are they taking?

Now, a growing number of companies are linking ESG standards to employee benefits, which could demonstrate their commitment.

93% of main index European companies are incorporating ESG measures into executive incentives

Research carried out by risk consultancy WTW reviewed public disclosures from companies listed on major stock indexes, such as the FTSE 100 and S&P 500. It found that the majority of European companies (93%) included in the study incorporated at least one ESG metric in their executive incentive plans – up from 75% three years ago.

The growth was mostly driven by environmental and climate metrics, the prevalence of which increased from 21% in 2020 to 56% in 2023. Given that governments around the world are taking steps to reduce their contribution to climate change, it’s perhaps not surprising that businesses are increasingly focusing on the environment.

Yet, in Europe, the most prevalent ESG measures companies are using in their incentive plans are social metrics. Social issues cover a broad range of areas, from customer service to preventing abuses within the supply chain.

Richard Belfield, executive compensation and board advisory practice leader at WTW, said: “Companies’ interest in tying executive incentive plans to ESG measures is showing no signs of abating.

“In fact, companies in some industries such as IT and consumer goods that have previously shied away from using ESG measures are now joining in with the wider trend and have narrowed the gap with other industries. The ongoing growth we are seeing reflects the continued focus from companies across markets and countries to articulate to stakeholders how ESG priorities are embedded in their business strategy and how they are used as a key measure of non-financial performance.”

Europe is leading the way in this trend, but other regions could soon catch up. In the US, around three-quarters of the businesses assessed used ESG metrics within executive incentive plans, and 77% do in the Asia Pacific area.

ESG measures in incentive plans could boost confidence among investors

Many investors are concerned about misleading sustainability claims, dubbed “greenwashing”. Indeed, a PwC survey of global investors in 2023 found that 94% of investors believe corporate reporting on sustainability performance contains unsupported claims.

When used alongside other information, knowing that companies are adopting ESG measures in executive incentive plans could help you make informed decisions. You might feel more confident about a company’s ESG report and pledges if they are part of the growing number of firms that are providing motivation for leaders to engage with ESG issues.

As with any investment, reviewing an ESG investment opportunity to assess if it’s right for you could be a crucial step.

While a business’s practices might align with your ESG view, it doesn’t automatically mean you should invest. You might want to assess how it fits your risk profile, investment time frame, and goals to ensure it reflects your investment strategy.

Contact us to talk about ESG investing

If incorporating ESG issues into your investment portfolio is something you’d like to learn more about, please contact us. We could help you balance your ESG and financial goals through a tailored investment plan.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.