ESG in executive pay: Europe overtakes Australia in incorporating metrics

European companies – including those listed in the UK – have taken the global crown when it comes to incorporating ESG metrics into executive compensation, according to research from Guerdon Associates.

The firm, alongside sister companies in the GECN Group, looked at the use of ESG and other non-financial metrics – measures it terms ‘ESG plus’ – in executive incentive plans across global markets, covering the S&P 100 in the US, Canada’s TSX 60, France’s CAC 40, Germany’s DAX 40, Switzerland’s SMI 20, the FTSE 100 in the UK, Australia’s ASX 100, South Africa’s JSE Top 40 and Singapore’s STI 30.

Big jumps in ESG metric adoption

While Australian firms had been way ahead of global peers in incorporating ESG metrics in executive compensation in both 2020 and 2021, many more companies across Europe and the UK began incorporating these measures in the past year.

For example, in 2020, 68 percent of European companies and 66 percent of UK companies used ESG metrics as part of their executive compensation plans. This jumped to 79 percent across each market by 2021 and then jumped again to hit a research high of 88 percent in Europe and 87 percent of UK-listed firms this year.  

By contrast, over the last three years, the Australian market had consistently seen high numbers of companies using such metrics to measure performance and determine executive pay. In 2020, 77 percent of companies on the ASX 100 had already incorporated ESG into executive pay, jumping to 84 percent last year. But the pace of growth has since slowed, with just a 1 percentage-point increase between 2021 and this year.

ESG and executive pay laggards

Researchers at Guerdon Associates say companies in North America and Singapore ‘continue to be the slowest in adopting ESG measures’, though in Canada the number of companies incorporating ESG metrics has actually fallen in the past year, making it the only market to have seen a reduction in the number of companies incorporating ESG metrics into senior compensation.

The research shows that in 2020, 63 percent of Canadian firms were using such measures, climbing to 70 percent in 2021 before dropping below 2020 levels to a global low of just 62 percent of companies in the TSX 60 this year.

In both the US and Singapore, numbers have been rising steadily to hit 63 percent of both the S&P 100 and STI 30, but remain way behind global leaders in Europe, the UK, Australia and South Africa, where 83 percent of companies listed in Johannesburg now incorporate ESG into executive pay.

Environment on the up

Guerdon Associates says the ‘big change has been toward environment and climate change’, with half the companies that use ESG measures in incentive plans now incorporating an environmental measure.

The findings echo research from IR Magazine sister publication Corporate Secretary, which also finds that far fewer boards at companies in North America are linking their executives’ compensation to ESG than are their peers in Europe.

According to the research published in Executive compensation: Insight on companies’ governance, among those globally who say executive pay is tied to ESG, the most frequently cited metric is environmental issues such as climate change, water, biodiversity and pollution. The next-most frequently cited issues are health and safety, diversity, equity and inclusion, corporate culture, supply-chain management and community relations.

Less than half of those in North America whose board links executive compensation to ESG metrics say they use environmental issues, compared with more than nine out of 10 of those in Europe.