In recent years there has been a persistent upward trend of companies employing ESG measures in their executive remuneration schemes. We follow on from our earlier article on ESG trends in February (see HERE), to reveal which non-financial measures are most material.

In keeping with February’s article, we focus on large-cap companies in countries where Guerdon Associates’ GECN Group advises on executive remuneration matters.

Our latest ESG incentives data reveals an increasingly long-term and environmental orientation globally. ESG measures are appearing more in LTI plans, with a heightened prevalence of environmental metrics.

We group ESG incentive measures into five broad categories: social, environmental, customer, community, and governance (social measures relate to employees and workplace policies, whereas community measures relate to stakeholder relations and engagement with communities at large).

Environmental and social concerns appear to be of the most paramount importance to companies globally, as highlighted in Figure 1. This illustrates the prevalence of ESG measures by category. Social metrics have been the most commonplace in each of the past four years, with a 76% adoption rate in 2023. Environmental measures exhibited the most rapid rate of adoption, surging to second place in 2022. The other categories were relatively stable, with governance and community measures seeing some cutback.

Figure 1: Global prevalence of ESG incentive measures among large-cap companies, by ESG category

It is expected that the pre-eminence of socio-environmental matters will remain for years to come. Other ESG measures may not gain much traction, given the materiality of socio-environmental concerns. Metrics related to customer (e.g., NPS, product quality, responsible sourcing), community (e.g., philanthropy, human rights, stakeholder relations, community engagement), and governance (e.g., legal compliance, company values and behaviours, cyber security, privacy) concerns may either see stagnation or cutback, depending on materiality.

Environmental metrics include measures of greenhouse gas (GHG) emissions (e.g., scope 1/2/3 emissions), renewable/non-renewable energy use, environmental incidents (e.g., oil spills), hazardous materials (e.g., toxic waste), and general air/land/water management. Figure 2 breaks down the prevalence of the main types of environmental measures over the past four years.

Figure 2: Global prevalence of environmental measures, by type, among large-cap companies using environmental measures

The joint trend towards increasingly long-term and environmentally oriented scorecard measures indicates a growing focus on longer-term environmental matters, such as climate change. The rapid adoption of environmental measures has seen GHG emissions emerge as the primary metric, with 83% adoption by large-cap companies, with the next-most common being renewable/non-renewable energy use at 28% adoption. This emphasis on GHG emissions and energy use highlights a climate-change focus, with metrics addressing other environmental concerns being minority practice among large-cap companies globally.

Social metrics include those related to diversity/inclusivity (Diversity, Equity & Inclusion, or DEI), workplace safety (e.g., fatalities, injuries, exposure to harmful substances), employee engagement and turnover, and general workplace policies. Figure 3 breaks down the prevalence of the main types of social measures over the past four years among the large-cap companies that have adopted them.

Figure 3: Global prevalence of social measures, by type, among large-cap companies using social measures

The most popular social metric is DEI, with 65% adoption, followed by employee engagement at 45%, and workplace safety at 44%. All social measures grew in prevalence on last year, reversing a slight negative trend in recent years for both employee engagement and voluntary turnover. Only DEI metrics have achieved majority adoption, highlighting that large-cap companies are primarily concerned with ensuring diverse and inclusive workplaces, even before workplace health and safety issues are addressed.

Figure 4 breaks down the prevalence of environmental measures by GICS sector across all companies surveyed. Over the past reporting period, the sectors with the highest prevalence have been the Materials (89%), Utilities (86%), and Energy (79%) sectors. This is unsurprising, as these are “polluting” and fossil fuel exposed sectors closely associated with heavy industry and/or energy production/usage. Surprising is the relatively high prevalence and rapid growth of these measures in Health Care (73%), and the relatively low prevalence in Industrials (64%), another “polluting” sector.

Figure 4: Global prevalence of environmental measures among large-cap companies, by GICS sector

To see more on our global ESG research see our GECN Group’s 4^th annual ESG research report, “2023 Global Trends in ESG Incentives: Entering the Next Phase of Maturity”, available HERE.

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