Global review of ESG incentives indicates increasingly long-term and environmental orientation worldwide

The 4th annual ESG research report by the GECN Group, entitled 2023 Global Trends in ESG Incentives: Entering the Next Phase of Maturity, was published in December. We briefly summarised the key findings in our last newsletter, focusing on large-cap companies in countries where our GECN Group advises on executive remuneration matters.

Now we take a closer look at how ESG measures are moving into LTI plans.

Since 2020, we have seen a steady increase in the global prevalence of ESG measures in executive incentive plans, as illustrated in Figure 1. While these measures are predominately incorporated into STI plans, a steadily increasing allocation to LTI plans has also been observed. This reflects more alignment with longer time horizons among global large-cap companies.

Figure 1: Global prevalence of ESG measures as a % of surveyed large-cap companies, within both overall variable remuneration (ESG) and long-term incentives (ESG in LTI).

Similar trends are apparent for ASX 100 companies, as shown in Figure 2. While the ASX 100 are among the global large-cap leaders in ESG adoption, Australia has lagged behind global peers in incorporating these measures into long-term incentive plans, with only 12% of the ASX 100 companies doing so relative to 34% of large-cap companies globally. In fact, Australian usage of ESG metrics in LTI has remained stagnant the past two years.

Figure 2: Prevalence of ESG measures as a % of ASX 100 companies, within both overall variable remuneration (ESG) and long-term incentives (ESG in LTI).

The GECN Group’s 2022 ESG research report noted that some ESG measures have been incorporated into LTI since these measures reflect long-term targets, such as net-zero greenhouse gas emissions by 2050. While such long-term sustainability plans can span decades, companies break long-term plans down into interim milestones to capture ESG progress. This break-down most often comes in the form of 3-year goals (due to the timespan of most LTI plans), though some companies also utilise 4- and 5-year targets.

Figure 3 displays the prevalence of environmental ESG measures among the companies surveyed, considering both ASX 100 companies and the entire global large-cap sample. Although Australia appeared to perform relatively well in adoption of environmental measures during the 2020-21 period, the ASX 100 appears to have fallen behind its peers abroad in the past two reporting periods, stagnating on last year at 40% adoption (relative to 61% globally).

Figure 3: Prevalence of environmental ESG measures as a % of both ASX 100 (AU) and international large-cap companies (Global).

The increasing global prevalence of environmental ESG metrics is consistent with greater global incorporation of ESG into both long-term and overall variable incentive plans. In contrast, stagnation on environmental measures among the ASX 100 resembles the stagnation observed domestically over the past two reporting periods for broader ESG adoption in LTI.

Our findings suggest that the increasing focus of large-cap companies on environmental concerns may explain the greater prevalence of ESG measures in LTI plans, since environmental targets are often long-term in scope. However, ASX 100 companies seem to be lagging behind large-cap peers abroad, on both adoption of environmental measures and incorporation of ESG into LTI schemes.

To receive the full and complementary report, which describes the details of ESG measures used in executive incentives, see HERE.

You can read previous years’ GECN ESG reports HERE.

© Guerdon Associates 2024
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