Companies plan to align ESG priorities with incentive plans

Investor pressure and recognition of benefits are driving the change

Companies around the world are accelerating their focus on environmental, social and governance (ESG) priorities as climate change and diversity issues gain prominence, but more work is needed.

Over the next three years, four in five companies plan to change how they use ESG in their executive incentive plans, according to a survey of board members and senior executives by Willis Towers Watson.

More than four in 10 respondents said they intend to introduce ESG measures into long-term incentive plans over the next three years, with 37% planning to implement these factors into their annual incentive plans.

While increasing institutional investor interest in ESG is driving companies to make changes, they are also realising the benefits of the approach. More than three in four respondents believe ESG is a key contributor to stronger financial performance. 

However, companies said the biggest challenges in implementing ESG measures are target setting (52%), performance measure identification (48%) and performance measure definition (47%). 

Three in 10 companies have created a new executive role to drive ESG strategy and identified new positions in their firms to help achieve it. Nearly half said they are either planning to review their culture to ensure ESG is embedded throughout their organisations or are considering to do so in the future. 

Almost 85% of companies are developing ESG implementation plans and 81% have identified ESG priorities, while over half are accelerating their priorities and timing.

However, companies are on different paths with just under half having incorporated ESG into all aspects of their businesses – strategy, operations, and products and services offerings.

Ryan Resch, managing director for executive compensation at Willis Towers Watson, said this suggests more work needs to be done.

“Boards have been asking for more information on ESG strategies and priorities, particularly in the areas of the environment and employee diversity, to understand their alignment to sustainable value creation and materiality,” said Resch. “Their goal is to support the identification of the right measures for their incentive plans with appropriate performance targets.” 

The survey covered 168 organisations across North America, Europe, Asia, Africa and the Middle East, which collectively employ 2.2 million workers.