Despite US politicians and activists tearing chunks from each other over the relative merits of ESG, Wall Street companies have voted overwhelmingly to integrate environmental, social and governance measures into executive pay.

New research reveals a growing trend mirroring what’s already happening in the UK and on the continent: the linking of C-suite pay deals to ESG performance.

The Conference Board, a US governance thinktank, says 73% of S&P 500 companies in 2021 tied executive pay to “some form” of ESG performance. Just over half of those, 51%, chose diversity, equity and inclusion (DE&I) as their main ESG measures, up from 31% the previous year.

Companies have been slower, or more reluctant, to couple pay with climate. The figures reveal only 19% are using carbon footprint or emissions reduction goals to link to pay, though that has grown from 10% in a year.

In an article for the Harvard governance blog, Merel Spierings of the Conference Board writes: “To date many companies have adopted ESG performance measures to signal that ESG is a priority, in response to perceived investor pressure, or to achieve previously made ESG commitments.

“Ideally, however, companies should incorporate ESG goals because they are linked to the company’s strategy and can drive meaningful change.”

‘Responsibility to shareholders’

“Investor pressure” is right. When BlackRock CEO Larry Fink wrote his most recent annual letter to chief executives, he said: “As stewards of our clients’ capital we ask businesses to demonstrate how they’re going to deliver on their responsibility to shareholders, including through sound environmental, social and governance practices and policies.”

Under pressure from some political quarters this year, Fink has also fiercely defended BlackRock’s position. Though the biggest investment manager, BlackRock is not alone in applying pressure for improved ESG performance. Other investors have joined in, too.

But pressure is also coming from regulators. The Securities and Exchange Commission, the US financial regulator, launched a consultation in March on the introduction of mandatory climate risk reporting, a move that has met with loud opposition.

The Conference Board says US companies are pushing ahead with the pay-ESG link to signal ESG is a priority, in response to investor expectations and to achieve commitments made by the firm.

The Conference Board worries an ESG link to pay may not always be appropriate. Some big investors don’t always approve “especially if there not a strong business case for doing so and if the ESG goals are not sufficiently challenging or specific”.

In the UK, business advisory firm PwC found earlier this year that 86% of FTSE 100 companies use ESG measures for annual bonuses and/or long-term incentive plans. This compares with 64% in 2021.

Here too, diversity and inclusion are the most popular issues to judge pay.

Close observers say one of the difficulties is setting “objectives that are sufficiently clear, precise and measurable” for executives to pursue. However, they appear united that public demand will push companies to demonstrate they are making progress on ESG issues and pay will be a way of achieving that.