Liz previously blogged about how the concern about using ESG incentives to improperly reward executives may not be supported by current data. Another concern investors have had is whether using ESG metrics in executive compensation programs might incentivize companies to greenwash and not actually walk the walk. A recent study by Pawliczek, Carter and Zhong suggests that Say-on-Pay voting laws enable investors to demand better ESG performance and positively impacts companies’ environmental policies. Below is an excerpt of the paper’s abstract:
Investors are increasingly demonstrating a preference for superior ESG performance among their portfolio firms. Concurrently, the use of ESG-related contracting metrics in executive compensation contracts has increased. We investigate these two related issues in the context of the adoption of Say-on-Pay (SOP) voting laws, which provide investors a direct voice about compensation and an additional avenue to express their preferences. Exploiting the staggered adoption of SOP laws around the world, we find that the use of ESG metrics in compensation contracts and ESG performance increase after SOP adoption. Notably, the improvements in ESG performance are concentrated in countries with greater increases in ESG contracting, suggesting that ESG contracting serves as a pathway to facilitate improvement in ESG performance. Additionally, improvements are concentrated among firms with sophisticated owners, in stakeholder countries, and those with CSR committees. Lastly, we show that the improvement in ESG performance contributes to the positive effect of SOP laws on shareholder value.
Investors want more transparency and accountability with ESG metrics and disclosures — and compensation committees increasingly need to consider whether and which ESG incentives are appropriate for their executive incentive programs.
The spotlight on ESG metrics isn’t going away, and we’ll be covering this hot topic at our virtual Proxy Disclosure and Executive Compensation Conferences” on October 12-14. Tack on our 1st Annual Practical ESG Conference for even more valuable information about ESG programs, risks and opportunities that could affect ESG metrics. The conferences can be bundled together for a discounted rate. Sign up online, email Sales@CCRcorp.com or call 1-800-737-1271.
— Emily Sacks-Wilner, CompensationStandards.com, July 13, 2022
