A recent 32-page report from Southlea Group (which is a Canadian executive compensation consulting firm owned by the same group as Farient Advisors) says that ESG metrics are starting to evidence “staying power” globally — even though there’s been some back and forth on whether they are actually valuable.
For the U.S., the report looks at the S&P 100. It offers this prediction on the direction of ESG metrics:
Companies will continue to move toward better-defined and articulated alignment between stakeholder and shareholder value. That is, the focus on “value” will overcome a focus on “values.”
The report is useful because (among other things) it shows the stages of incorporating ESG metrics into an executive compensation program, excerpts policies on this topic from select global institutional investors and shows examples from specific companies of qualitative and quantitative metrics. Page 30 offers these action items for boards to consider:
1. Ask the right questions (see sidebar)
2. Identify measures that are derived from the strategy and can move the needle on sustainable performance
3. Consider the use of stakeholder measures not only in short-term but also in long-term incentive plans
4. Take a broad perspective in considering the use of stakeholder measures, e.g., use of measures inside as well as outside of incentives, alignment up and down the organization, messaging in all types of company communications (internally and externally), impact on culture, and comparisons with peer and most-admired companies
5. Review board governance of stakeholder matters to provide effective oversight. Ensure that governance responsibilities are assigned and overlapping, as needed, to avoid gaps or lapses in oversight
As these action items suggest, the decision of whether — and how — to incorporate ESG metrics is challenging and company-specific. I’ve blogged about common pitfalls specific to DEI metrics, which are the most common nonfinancial metrics for most companies right now. A Forbes article from McDermott’s Michael Peregrine analyzes the risks of incorporating ESG metrics, including:
– Investor skepticism
– Data controls
– Untested payout levels
– Extra work
– Communication challenges
– The politicization of ESG
– Unreliability of ESG ratings
Visit our “Sustainability Metrics” Practice Area for more guidance on this topic.
— Liz Dunshee, CompensationStandards.com, December 6, 2022
