The majority of corporate boards worldwide have confirmed a stronger focus on environmental, social and governance (ESG), and diversity and inclusion (D&I) priorities over the next three years, according to Willis Towers Watson.
Global events such as the pandemic, economic uncertainties, and social and racial injustice are sparking company boards around the world to accelerate focus on ESG & D&I, reveals the survey of board directors at companies across North America, Europe, Asia, Africa and the Middle East. These priorities will also be tied to employee compensation and incentives, confirmed the leading global advisory, broking and solutions company.
LINKING ESG & D&I GOALS TO COMPENSATION
An increasing number of organisations expect to revise compensation and incentive plans to reflect their ESG & D&I priorities, reveals the study. In fact, nearly four in five respondents (78%) are planning to change how they link ESG with their executive incentive plans over the next three years.
More than four in 10 (41%) plan to introduce ESG measures into their long-term incentive plans, while 37% plan to introduce ESG measures into their annual incentive plans. Additionally, about a third plan to raise the prominence of environmental and social/employee measures in their incentive plans.
“With institutional investor interest in ESG and sustainable investing increasing, companies are maintaining or accelerating their focus on ESG initiatives,” commented Shai Ganu, Global Head of Executive Compensation at Willis Towers Watson. “We know from our research and consulting that companies’ focus is on a stronger alignment of executive compensation plans and ESG priorities, particularly with climate change and environmental measures, inclusion and diversity matters, and overall human capital governance.”
DIVERSITY & INCLUSION FOCUS
The survey also identified the challenges that companies are facing with using ESG metrics in incentive plans. Some of the biggest challenges include target setting (52%), performance measure identification (48%) and performance measure definition (47%).
In North America, nearly three-quarters of respondents (73%) have implemented at least one initiative to promote D&I at their organisations, with another quarter planning or considering doing so. About four in 10 companies (43%) have conducted a pay equity analysis. Just under half (46%) have established or have supported internal inclusion and diversity networks, and another 32% are planning or considering doing so. Additionally, 44% have increased their communication of policies and benefits that promote an inclusive culture.
WELLBEING & FAIR PAY
Employers are also taking various measures to review their workforces through an ESG lens. Nearly half (46%) said they have deployed listening strategies to engage with their employees, while three in 10 have created a new executive role to drive ESG strategy; identifying new positions in their organisations to help achieve their ESG strategy.
Nearly half of the company directors said that they are either planning to review their culture to ensure ESG is embedded throughout the organisations; or are considering to do so in the future. In addition, about one in five expect to add board and/or compensation committee oversight of wellbeing and fair pay within the next three years.
ACCELERATING ESG PRIORITIES
Overall, while most companies are developing ESG implementation plans (84%) or have identified ESG priorities (81%), less than half (48%) have incorporated ESG plans into all aspects of their businesses – strategy, operations, and products and services offerings; indicating that companies are on different parts of their ESG journey. Over half (53%) are accelerating their ESG priorities and timing. Additionally, over three in four company boards (78%) believe ESG is a key contributor to stronger financial performance.
Commenting on the survey findings, Ryan Resch, Managing Director, Executive Compensation, Willis Towers Watson, stated: “Although companies are revising their use of ESG measures to support their executive pay programmes, it appears more work needs to be done. Boards have been asking for more information on ESG strategies and priorities, particularly in the areas of the environment and employee diversity, to understand their alignment to sustainable value creation and materiality. Their goal is to support the identification of the right measures for their incentive plans with appropriate performance targets.”
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