The Advisors' Blog

Inquiring compensation committees want to know: Are ESG metrics moving the needle for long-term shareholders? Incorporating climate and diversity goals has certainly taken off as a trend at big companies over the past few years. But even outside of the “anti-ESG” camp, the approach isn’t universally loved. In fact, some of the biggest investors & asset managers have expressly stated that if ESG metrics are included in pay plans, the metrics should be rigorous, transparent, and aligned with corporate strategy – which as our 8-page checklist and this blog demonstrate, is easier said than done.

This Bloomberg article says that proponents and the media are now also casting a more critical eye towards ESG incentives. Here’s an excerpt:

As companies increasingly tie executive pay to ESG, there’s evidence to suggest the add-on is being used to enable bigger remuneration packages without leading to any meaningful environmental, social or governance improvement.

In response, activist shareholder groups are demanding more disclosures around ESG-linked pay to force companies to produce transparent metrics. Currently, many of these bonuses are shrouded in vague language, according to US-based nonprofit As You Sow, which focuses on investor issues ranging from climate change to gender inequalities.

The article discusses criticism of a pharma CEO who received a payout based on reduced emissions, even though the company’s overall emissions increased when all Scope 3 emissions were taken into account. Given the complexities of reducing (or even tabulating) Scope 3 emissions, it isn’t surprising that the target was structured this way – but it’s another example of ESG metrics potentially being riskier than first meets the eye. “Human capital” metrics aren’t any easier, either. For example, we’ve noted that companies using DEI metrics must tread very carefully. It’s enough to make “simple” executive pay packages sound pretty appealing.

All that said, if you have already incorporated – or are considering incorporating – environmental or social metrics into your pay plans, make sure to check out our “ESG Metrics” Practice Area for benchmarking and tips. Remember that setting & measuring these goals should be a cross-functional effort – and your team should include employment lawyers.

– Liz Dunshee