MM&K speaks at GECN Group webinar – How to Incentivise ESG Performance? Global and Local Trends 2024

On Thursday 8th February, Margarita Skripina, Head of Research and Analysis at MM&K joined an international panel of experts comprising fellow GECN Group members, Southlea Group (Canada), Farient Advisors LLC (USA), HCM International Ltd. (Switzerland) and 21st Century (South Africa) to share our latest global research on the inclusion of ESG performance measures within executive incentive plans and discussed the latest trends in each of our regions.

Some of the key findings discussed were:

• Context under which companies are considering how to embed ESG measures within their incentive plans, including addressing challenges associated with the long-term orientation of many ESG strategies, differing perspectives on the degree, speed and type of ESG initiatives and expectations for companies to show real progress
• Greater standardisation in ESG disclosures is expected, which will improve comparability and the refinement of ESG incentive measures
• The adoption of ESG measures within executive compensation has increased to 87% of large global companies
• Companies continue to include employee measures in incentive plans (76% of companies) while Diversity, Equity & Inclusion (DEI) is the most common employee measure.
• Environmental measures have seen the biggest increase in prevalence (61% of companies). GHG Emissions are the most common
• Companies continue to use a mix of quantitative and qualitative ESG measures (65% of companies). The use of only quantitative ESG measures remains a minority practice (14% of companies) with little change over the past four years
• ESG incentives are increasingly being incorporated into long-term incentives (34% of companies), although there are large regional differences ranging from 12% in Australia and the U.S. to around 50% in Europe, the U.K. and South Africa
• The average weighting of ESG incentives remains 25% in short-term incentives and 20% in long-term incentives with little change over the past four yeas
• The weighting of ESG measures in incentives as a share of total CEO compensation has increased to 11% across the board but there are regional variations.

Regional perspective

In the UK regulatory requirements vary by company size and listing type. Recent updates to the UK Corporate Governance Code and the QCA code impact premium listed and AIM-traded companies, respectively. The Codes operate on a ‘comply or explain’ basis, allowing much needed flexibility in their application. Large UK companies must also include non-financial and sustainability information in their annual reports to comply with FCA Sustainability Disclosure Requirements. ESG metrics are mainly favoured by short-term incentive plans; however, their presence in long-term incentives has significantly increased to 54% of companies. Private equity firms differ, with listed firms integrating ESG targets into incentives and producing Sustainability Reports, while private firms are less inclined to do so. However, firms are now hiring ESG-focused personnel to enhance portfolio company performance.

Europe leads in sustainability with the highest ESG adoption rate of 93%, particularly in long-term incentive plans where ESG metrics integration in on par with the UK (54% on average, with Germany and France leading due to regulatory requirements). However, Switzerland trails behind with only 28% of major companies linking ESG to their plans. Despite progress, there’s room for improvement, notably in aligning compensation plans with material ESG issues. Future shifts are expected with new regulations like the Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive, impacting both European and Swiss companies, necessitating increased transparency on sustainability targets.

South Africa’s ESG focus is notably high among top companies, on a par with Europe. However, this trend mainly applies to larger global firms and does not reflect the broader local landscape. Local companies hesitate to embrace ESG due to cost concerns, preferring internal corporate social investment strategies, especially in employee and community support. Social factors (particularly DEI) dominate, driven by legislation like Black Economic Empowerment (BEE) and Employment Equity (EE). Long-term strategies are necessary for achieving demographic representation (including gender targets) leading to high ESG integration in LTIs (51%). Yet, ESG weightings remain low, comprising less than 12% of total earnings, highlighting a need for stronger commitment from South African companies.

In Canada, the economy heavily relies on natural resources, posing significant environmental challenges. Balancing long-term environmental sustainability with short-term economic growth is essential. This requires considerable time, significant investments, and a clear regulatory framework. Canadian companies are progressing in their ESG efforts; however, sophistication varies by size and sector. As they set clearer ESG targets, we anticipate increased adoption of quantifiable environmental incentives, driven by investor and stakeholder pressures.

In the US, ESG has become politicised, leading to a backlash against corporate efforts. Some US states have enacted regulations limiting business dealings with firms supporting ESG issues like climate change or DEI. However, most companies continue implementing ESG strategies. Some are rebranding to “sustainability” or focusing on emissions reduction and workforce metrics. Others are focusing on ESG measures that are directly linked to financial returns and shareholder value. Overall, ESG adoption is growing across companies, mostly in STI plans. Future trends include refining ESG goals for business relevance and meeting shareholder expectations.

We believe that it is important for companies to take a planned approach when embedding ESG measures within their incentive plans. Our report articulates the eight steps for consideration in the design process.

To download a complimentary copy of the 2024 Global Trends in ESG Incentives Report click here or for more information please contact Margarita Skripina.

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