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Understanding ESG
Firms embed ESG into employee compensation
CO2 reduction, diversity, corporate governance most common areas targeted
The Asset 7 Jun 2024

Almost two thirds (60%) of companies around the world that responded to a survey conducted by a non-profit body dedicated to advancing knowledge and understanding of global equity compensation say that they apply environmental, social and governance (ESG) targets to share-based employee compensation.

The most common areas for these ESG targets, as revealed by the Global Equity Organization’s Global Equity Insights Survey, are:

  • CO2 reduction
  • Diversity
  • Corporate governance.

Of companies that reported that they apply ESG targets, 84% say that they apply them to the management board. These targets set the strategic direction of the company for its board members, who use it to guide their implementation of day-to-day operations.

Notably, 40% of companies that reported they use ESG targets say they apply them to short-term incentive plans, which companies are increasingly offering to a wider range of employees to secure talent and lock in innovation.

By comparison 30% of companies say that they apply ESG to long-term incentive plans (LTIs), which are typically used to incentivize executives.

Overall, 18% of companies says that they apply ESG targets to both plan types, while 13% say that, although they don’t currently use ESG targets, they were considering introducing them.

Low-performing companies, the survey suggests, are more likely to only apply ESG targets to their LTIs than high performers are, with 20% of ‘low performers’ saying they have applied them, compared with just 11% of companies noted as high performing.

Notably, 84% of companies who responded to a survey question on environmental targets say that they have applied targets related to reducing such emissions.

Social targets

Notably, 40% of respondents say they are applying social targets to the increasingly high-profile issue of employee diversity, with 30% of companies in North America apply targets related to gender diversity in management positions and 70% of companies in the region applying targets related to diversity in general.

While 22% of companies have created targets for the reduction of accidents, that figure rises to 33% for firms outside Europe or North America, suggesting the issue is most acute for countries where health and safety regulations are still rapidly evolving.

Governance targets

According to the survey, 39% of companies are applying corporate governance targets to ESG instruments, with that figure rising to 67% in North America. And 28% of companies are focusing on stakeholder relationships, while a further 17% are incorporating targets relating to sustainable supply chains.

The issue of supply-chain sustainability appears to be more prominent in Europe, with 22% of companies on the continent incorporating such targets into supply lines.

Influencing factors

Institutional investors and proxy advisers, the survey’s research shows, have a significant influence on responding companies’ ESG targets, with more than half (62%) saying that they have a medium-to-high influence.

While 42% of North American companies surveyed describe institutional investors and proxy advisers as having a ‘medium’ influence on the targets, 43% of European companies say that their impact was ‘high’, reflecting the increasing influence of proxy advisers on European organizations.

The report also points out that 38% of companies questioned publish ESG reporting information within the annual report and that many also publish using other channels, while 32% of companies still don’t report on ESG topics in relation to LTIs.

“More and more companies worldwide are working hard to figure out how they can best embed ESG principles into employee compensation, including employee equity plans,” says Sheila Frierson, president, plan managers business, North America, at Computershare, one of the report’s sponsors. “Companies will aim to implement systems that best align with the goals of the company, such as reducing their environmental imprint or increasing employee diversity.

“Their approach will also be influenced by relevant jurisdictional ESG regulations, such as the EU’s Sustainable Finance Disclosure Regulation, or voluntary guidance, such as Australia’s principles for responsible investment.”

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