In a time with ever increasing focus on climate change, diversity & inclusion and social responsibility – and with shifts in investment policies and capital flows with a positive tilt towards ESG factors (Environmental, Social and Governance), we have taken a look at the current state of ESG metrics (including environmental, employee engagement and diversity & inclusion) being a part of executive incentive and remuneration packages in Europe and the Nordics.
In more than half the surveyed companies ESG is a factor in Executive Remuneration
The findings show that ESG metrics are currently used in a little more than half the surveyed organizations short term incentive plans with a positive tilt towards Energy, Chemical and life-sciences companies whereas the service sector, high tech, retail & consumer goods are less likely to use or consider using ESG metrics as part of their remuneration programs. This corresponds with the environmental challenges in the Energy and Chemicals sectors and the ethical and social considerations that are fundamental to the Life Sciences companies. Also ESG metrics are less likely to be part of the long term incentive programs.
The combined weight of ESG metrics in the design of executive remuneration programs typically ranges from 5-10%, and most often it is measured quantitatively. The most typical ESG metric to be included in the incentive plans are Employee Engagement and Environmental metrics. Diversity & Inclusion are less prevalent and are also more likely to be a qualitative metric. We expect Diversity & Inclusion to have a stronger representation in the future as companies become more sophisticated in measuring D&I metrics.
The Nordics may fall behind in the future
So what does the survey show regarding the prevalence of ESG metrics as part of executive remuneration programs in the Nordics compared to Europe? It is actually almost equally likely that ESG metrics are being used in remuneration plans today, but it is far less likely that we will see a future increase in using ESG metrics in the Nordics compared to Europe. So the Nordics, where we generally have a perception of being front runners on ESG especially in relation to investments, are not setting ourselves up for living up to the self-image when we look at the future implementation of policies tying ESG performance to executive rewards. Consequently we may see ourselves fall behind, unless we see a shift in priorities and plans. For example, as a consequence of stronger public scrutiny coming into practice on executive remuneration.