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The adoption of environmental, social and governance (ESG) measures in executive incentive plans is rising, according to a new global study by Willis Towers Watson (WTW), a global advisory, broking and solutions company. 

In the United States, more than three in four S&P 500 companies (76%) reported in this year’s proxies that they incorporated at least one ESG metric in their executive incentive plans, an increase from 69% the previous year and just 52% three years ago. Similar trends are occurring among companies in Canada, Europe and Asia Pacific, the WTW study found. 

While ESG metrics are still much more commonly used in short-term incentive (STI) plans, the prevalence of ESG metrics in long-term incentive (LTI) plans has nearly quadrupled in the past three years, the WTW study said. 

Metrics related to human capital remain the most popular across all ESG categories, used by 70% of S&P 500 companies. Environmental metrics also saw a significant increase in adoption in the U.S., rising from 12% to 44%.  Within the environmental category, carbon emissions reduction is by far the most common metric. 

“Companies’ interest in tying executive incentive plans to ESG measures is showing no signs of abating,” said Robert Newbury, senior director of the WTW Global Executive Compensation Analysis Team, on Jan. 24. “In fact, we are seeing narrower industry gaps in the use of ESG metrics as we see increased adoption in the IT and consumer goods industries. 

“The ongoing growth we are seeing reflects the continued focus from companies across markets and countries to articulate how ESG priorities are embedded in their business strategy and how they are seen as a key measure of non-financial performance,” Newbury added. 

This research study reviewed public disclosures from 1,146 companies listed in the S&P 500; TSX 60 in Canada; 328 companies across nine major European indices, including the FTSE 100; and the 264 largest companies across seven markets in the Asia Pacific region.  

Other key findings include the following: 

  • The prevalence of ESG metrics within executive incentive plans continues to rise in Europe and Asia Pacific, increasing from 90% to 93% and from 63% to 77%, respectively. 
  • Most European companies now include ESG metrics in their LTI plans, primarily in the environmental and climate areas. This represents a 35-percentage-point increase from 21% to 56% in the past three years. 
  • While Europe is ahead of North America in its emphasis on the environmental and climate areas, human capital metrics remain a top priority. In Europe, more than 80% of companies use at least one human capital metric in their executive incentive plans. 
  • In Canada, In Canada, four in five (80%) of TSX 60 companies reported using at least one ESG metric in their executive incentive plans, an increase from 68% three years ago. The use of environmental metrics rose from 27% to 50% in Canada. 

“We continue to see pressure from institutional investors to articulate how ESG and sustainability priorities drive long-term sustainable value creation,” said Ken Kuk, senior director of Executive Compensation and Board Advisory at WTW.  

“Meanwhile, North American companies are also seeing greater regulatory pressure on ESG-related disclosures,” Kuk said. “We expect a greater emphasis in identifying and measuring individual elements of ESG most impactful to businesses.”