Semler Brossy has published its
third report on the use of ESG metrics (parts 1 and 2 may be found
here and
here). In the first published report, Semler Brossy determined that 57% of S&P 500 companies have an ESG component in their incentive plan, whether qualitative or quantitative. The report highlights that ESG metrics will continue to evolve to a more weighted model within incentive structures.
This latest report dives into the four main strategies companies use to link ESG performance to award decisions. Pertinent findings include:
- ESG Metric Structure
- With regard to ESG metrics overall, just over 40% of the S&P 500 are using either a defined scorecard approach, a specific modifier based on ESG performance, or a weighted, standalone ESG metric.
- 36% of the companies using ESG metrics use a scorecard approach (defined as formally including ESG metrics as one of several unweighted components in a non-financial set of strategic priorities).
- 28% locate ESG metrics within a qualitative or subjective assessment of an executive’s individual performance.
- 20% use individually weighted ESG metrics.
- 16% use ESG performance within an award modifier (move a payout up or down a given percentage).
- Diversity and Inclusion
- 28% of the index now explicitly ties D&I metrics to executive pay incentives.
- 43% of those include these metrics on a scorecard.
- 36% include them within an individual performance component.
- 18% use them as a modifier.
- 3% use a discrete, weighted metric.
- Emissions
- 7% of the index ties emissions metrics directly to executive incentives.
- 48% of those include emission reductions in a scorecard.
- 27% include such metrics in the individual performance component.
- 15% use emissions as weighted metrics.
- 9% use them as a modifier.
The report highlights the steady, incremental increases in companies adding ESG performance to executive compensation. At this point, the SEC has strongly indicated a prescriptive disclosure regime is coming, which may further impact the evolution of ESG disclosures, how they are tracked and whether they are tied to pay.
