The Advisors' Blog

– Lynn Jokela

Liz blogged last summer about how most ESG metrics that are incorporated into incentive plans relate to shorter-term operational metrics rather than long-term sustainability objectives.  She noted the rationale for most doing so is because it’s easier to tie these operational metrics to the top or bottom line.  But, Willis Towers Watson recently reported that looking forward, things may start to change.  Here’s an excerpt from a Willis press release:

Willis conducted a survey of company directors.  Four in five respondents (78%) are planning to change how they use ESG with their executive incentive plans over the next three years. More than four in 10 (41%) plan to introduce ESG measures into their long-term incentive plans over the next three years, while 37% plan to introduce ESG measures into their annual incentive plans. Additionally, about a third plan to raise the prominence of environmental and social/employee measures in their incentive plans.

ESG metrics that fall within the sustainability bucket often include those relating to environmental, climate and broader social matters.  Even with change on the horizon, it doesn’t sound like companies and comp committees will have an easy time with it.  Willis reports that when tying ESG to incentive plans, companies encounter the biggest challenges with target setting, performance measure identification and performance measure definition.