There is some debate over whether customer satisfaction is an appropriate ESG metric, although it is a reflection of the views of an important stakeholder. While the number of companies including ESG metrics in their incentive plan is limited, it is growing. The analysis notes that in 2008, only 4.3% of companies included ESG metrics in compensation goals.
A notable trend that emerges from the report is that ESG metrics are significantly more common in the annual incentive than in long-term incentives. This is not surprising as often ESG metrics are included as part of the individual component of the annual incentive. However, the authors expect that as the broader investment community gains experience with ESG, they will push for long-term ESG metrics tied to measurable, quantifiable improvements. It is notable that next year, Irish companies will face the EU’s Shareholder Rights Directive (SRD) II, which directs investors to consider ESG issues when evaluating executive compensation and mandates say-on-pay votes across Europe. Additionally, under new EU rules published in March, insurance companies and money managers will be required to disclose how they are integrating ESG factors and how they adhere to ESG objectives in their investment decisions.
While Brexit may complicate this picture for UK companies, it is reasonable to assume that these EU rules will have an influence. For the US, the issues remain in public debate, but legislation related to ESG is being considered by the House of Representatives. It is likely that US companies’ use of ESG metrics will continue to evolve, but disclosure practices remain company specific. The Center will continue to monitor the trends and best practices of incorporating ESG metrics into both annual and long-term incentive structures as practices evolve.