In just two years the use of ESG pay incentives for executives has more than doubled, according to ISS ESG, the responsible investment arm of Institutional Shareholder Services (ISS).
The company’s latest report looking at global trends says while the dominant measures for performance and pay remain earnings or stock price, environmental and social (E&S) metrics are no longer an “afterthought”, with their use now skyrocketing.
According to Casey Lea, an expert at ISS ESG , environmental and social measures are now a “critical issue”.
“This rapid increase in adoption means investors must be mindful of not just who is adopting these incentives but also what type of metrics are being used, how important they are in driving executive pay, and the performance period on which they are measured,” he says.
The highest rate of adoption of E&S pay metrics are to be found in France, where 51% of companies use at least one E&S metric in their remuneration plans, followed closely by Spain with 48%. The UK ranks eighth with almost a third, 32.8%, and the US struggling on 7.8%, though that figure may represent a large number of companies.
The most popular metrics for ESG pay incentives are staff health and safety, and corporate social responsibility. Staff relations and training are the “emerging trends”. It will not come as news that the energy sector leads the way on E&S pay incentives, followed by materials and then real estate.
The figures will not surprise many observers already aware that ESG commitments are a much more mature trend in Europe than elsewhere. But it will be a timely reminder to some of an unshakeable drive to integrate ESG into the heart of business thinking.
Performance of diverse boards
The ISS ESG report ranges over a multitude of topics finding other clear trends: governments linked pandemic support packages with “sustainability objectives”; sustainable finance regulation is in development; stakeholder capitalism and changes in human capital management are growth areas.
ISS also made other key findings: the presence of women on boards is a benefit, as is an ethnically diverse board.
Boards with at least two women outperform Russell 3000 returns on three, four and five-year periods. Ethnically diverse boards outperform over four and five years, while less diverse boards underperform by around 0.25%, the ISS ESG report concludes.
ISS says: “Most dramatically, investors with holdings concentrated in companies without ethnic diversity would have lost out on 1.3% average additional returns annually over a four-year period, compared to investing in a basket of companies with strong ethnic diversity board signals.”
That will resonate with many in the year after the Black Lives Matters protests and in the wake of efforts this year by the World Economic Forum to place racial equality on board agendas.
Investors have already indicated they will address boards on ethnicity. State Street, with $2.7trn under management, said it would vote against any FTSE 100 or S&P 500 nominations or governance committee that fail to disclose the racial and ethnic composition of their board. Next year it says it will vote against chairs of those committees if their boards fail to have “at least” director from an “under represented community”.
Last year Legal & General Investment Management said it would vote against nominations committee chairs “if they fail to meet expectations on ethnic diversity”.