The Advisors' Blog

This recent Pay Governance Survey of 30 big UK & EU companies shows that nearly all of them have included ESG metrics in their incentive plans – compared to about 20% of US companies that were surveyed earlier this year. The European companies also had a much higher rate of ESG inclusion in long-term incentive plans (41%). These practices are worth a look, because they could foreshadow investor expectations here in coming years. Here are some predictions:

• The prevalence of ESG metrics in incentive plans is much higher in the UK and EU compared to the US, and it is likely the US will close the gap within the next 2-3 years based on past trends (for example, Say on Pay was first adopted in the UK and EU) as well as potential enhanced regulatory requirements (current S.E.C. review of 2010 interpretative release) and investor and societal pressures to prioritize ESG;

• Both UK/EU and US companies will increase the inclusion of ESG metrics in their respective long-term incentive plans as investors and regulators focus on how companies intend on achieving their long-term sustainability goals;

• The types of ESG metrics and plan designs used by both UK/EU and US companies are largely the same,including the use of scorecards, quantitative and qualitative goals,and relatively modest weightings; and

• Once adopted, it will be difficult to turn back,and many US companies are conducting their materiality assessments to select the metrics and goals that will have the greatest impact on the company’s long-term performance. Thus, as noted in our previous Viewpoint, we continue to believe “many [US] companies will use 2021 as a ‘launching pad’ for finalizing and rolling out ESG metrics” in 2022 incentive plans.

The survey says that with respect to Environmental metrics, reduced carbon emissions/greenhouse gas was the number one metric selected by UK/EU companies followed by waste reduction. Among US companies,energy efficiency/renewable energy was the top metric followed by reduced carbon emissions/greenhouse gas.

Diversity was the top Social metric among UK/EU and US companies. US companies also selected a companion metric – inclusion and belonging – at a much higher rate (43% compared to 19%).

– Liz Dunshee