The Advisors' Blog

Meredith blogged last week about trends in measurement techniques for ESG incentives. This 16-page memo from FW Cook – which looks at ESG incentive trends in the largest 250 US-listed companies in the S&P 500 – reinforces that there’s no universal approach. But there are common considerations & risks to consider (the memo lays out 9 of those).

What most caught my eye, though, was an acknowledgement that comp committees are pausing to make sure that what they’re doing in this area is having a positive business impact. Here’s what the memo says about emerging trends:

Our study observed a leveling-off of ESG measure prevalence, a possible signal that the momentum to emphasize ESG performance in incentive compensation has indeed slowed. This year’s study findings also align with our experience in seeing less focus and “airtime” in Compensation Committee meetings on this topic over the past year for reasons including:

• More challenging economic conditions turning focus to business improvements,
• Less pressure from institutional investors,
• Internal pushback regarding goal-setting calibration,
• Increasing politicization of the topic, and
• Board member/investor concerns over “greenwashing.”

Companies that already include ESG measures are assessing how to respond to pressure from institutional investors and proxy advisory firms to include more rigorous/quantifiable measures and increase disclosure transparency around performance achievement and corresponding impact on company value. Many large institutional investors have been vocal that they do not hold strong views about whether ESG measures should be included in compensation plans. Investors are primarily concerned with how ESG measures are implemented, expecting clear targets that have a strong tie to long-term strategy while also being measurable and transparent.

The memo explains that proxy advisors are similarly focused on ESG incentives being tied to pre-determined, quantitative targets that are transparently disclosed, rather than requiring or expressly encouraging ESG metrics.

The challenge for companies is finding a way to balance investors’ desire for transparent, quantitative metrics with the unique challenges presented by committing to numerical targets for DEI & other multi-faceted ESG-related incentives.

We’ll be discussing this important topic at our upcoming “Proxy Disclosure & 20th Annual Executive Compensation Conferences” – which are coming up virtually September 20th – 22nd. In particular, the panel “ESG Metrics: Beyond the Basics” – with Orrick’s JT Ho, Semler Brossy’s Blair Jones, Davis Polk’s Kyoko Takahashi Lin, and Pay Governance’s Tara Tays – will delve beyond the surface of “ESG is good” vs. “ESG is bad” and give practical guidance on what to do at this juncture. The conference is coming up quickly and so are year-end comp committee meetings! So register now. You can sign up online, by emailing sales@ccrcorp.com, or by calling 1-800-737-1271. Plus, you can bundle this conference with our “2nd Annual Practical ESG Conference” and get even more step-by-step guidance to conquer the “ESG overwhelm” that many of us our facing. That event is happening virtually on September 19th.

– Liz Dunshee