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In the ever-evolving realm of corporate governance, the “2024 Farient Global Stakeholder Trends” report offers a comprehensive analysis of the integration of Environmental, Social, and Governance (ESG) initiatives into executive compensation strategies.
In the seventh edition of Farient Advisors’ global research and fourth consecutive report focusing on ESG incentives, Farient and the Global Governance and Executive Compensation Group (GECN) take an in-depth look at ESG incentives from recent public disclosures across more than 500 companies listed on major indexes across the world. Amidst political polarization, economic uncertainties, and geopolitical tensions, the report looks to address the critical question: “What’s next for ESG incentives?”
ESG as a Strategic Value Driver: The analysis underscores that ESG has cemented its role as a strategic value driver across industries and geographies. Some companies walk a tightrope to fulfill the expectations of shareholders and their other stakeholders, meaning they must demonstrate the link between ESG strategy and shareholder value. Instead of retreating from ESG incentives, companies are amplifying their sustainability efforts to demonstrate meaningful progress against stated goals.
Incentives Tied to ESG Goals: Globally, companies continue to link executive incentives to their ESG strategies and objectives. This trend spans across large-, mid-, and small-cap companies, with 87% of large companies globally incorporating ESG measures into their incentive plans, reflecting a widespread commitment to sustainable practices.
Urgency in Emissions Reduction: The climate crisis has intensified the need to curtail greenhouse gas (GHG) emissions. The report notes a significant rise in incentives connected to emission reduction targets, signaling a collective response to environmental concerns.
Refining Measures and Assurance: Times have changed from the past when companies would include ESG as brief note in a company report or produce flashy reports on the good things were doing to expectations of tangible metrics and auditable ESG figures. Greater scrutiny has, in part, led to companies focusing more on material topics that impact stakeholder value as a matter of focusing effort. Environmental incentive measures related to GHG, for example, are up significantly from 2021 and 2020. Furthermore, approximately two-thirds of large global companies reporting ESG information now have at least some of their data audited.
Benchmarking ESG Goals: While most companies currently benchmark ESG goals against internal objectives, the report suggests that relative goals may become more prevalent. This shift is anticipated as ESG data becomes more comparable due to adoption of common ESG standards versus internal measures and transparent as a result of greater scrutiny.
The report also presents innovative approaches to incentive design through case studies on companies like Allstate, Dow, and Mastercard. Additionally, Farient’s proprietary “ESG Maturity Curve” illustrates the progression of companies as they refine the alignment of executive compensation with ESG performance measures.
Develop a Robust ESG Strategy: Before adopting ESG incentives, companies must establish a clear ESG strategy that supports their overall business objectives.
ESG Incentives Maturation: ESG incentives evolve over time. Companies often begin with process goals, advance to content goals, and ultimately implement ESG incentives with measurable goals and outcomes.
Ensure Adequate ESG Resourcing: Deciding to take serious steps to improve ESG performance and align incentives will only lead to disappointment if staff to oversee measurement, compliance, and initiatives lack proper tools to manage the many moving parts of stakeholder engagement, data collection, GHG calculation, and corporate disclosures.
Learn more about how IsoMetrix Lumina™ can streamline ESG reporting and strategy to help you reach your sustainability goals.
Source: See full report from Farient Advisors
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