Despite increasing interest in ESG, almost half of executives do not believe it is important to link it to pay incentives.
Just 55% of business leaders polled in a global survey believe it is important to connect ESG and executive pay, quite different from investors around the world, where support for such a link is 65%.
The survey, produced by PwC and the London Business School (LBS), polled 632 business leaders in nine countries and across 28 sectors. And while there was broad agreement on ESG incentives between business leaders and investors, there were significant differences too, including the importance of pay.
It’s not all about the money
A report written by Tom Gosling of LBS and Phillippa O’Connor of PwC, published on the Harvard governance blog, concludes many executives do not see pay as the main driver of ESG performance. “Instead,” the authors write, “they see the most important task to be the development of a culture where ESG considerations are integrated into decision making (for example, through training and education, leadership development and behaviour).”
While it will surprise few to learn that executives may be in disagreement with investors, it could be problematic for policymakers, who have used pressure from fund managers as a means of policing the conduct of companies on environmental and social matters.
While the survey finds that 82% of senior leaders have ESG targets in their pay, they part ways with investors on some key topics.
Risks and results
Corporate leaders focus on “ESG goals” aligned to value and their business strategies, such as employee satisfaction and health and safety. Meanwhile, investors are zeroed in on “systemic risks”, such as climate change. This prompts “a concern that investors are adopting a one-size-fits-all approach to ESG,” write Gosling and O’Connor, “based on issues that are most in the public eye—an approach that can be disconnected from individual business priorities”.
Business leaders believe a targeted approach is called for, focused on “why and how a specific ESG priority is linked to the company’s specific strategy”.
ESG-linked pay, therefore, is viewed by business leaders as “just one part of a complex network of interventions to create the right culture”.
“Premature” linking of pay to ESG, before the right metrics are addressed, could be “counterproductive”, leaving badly designed incentives with the potential to “undermine a broader culture”.
Is ESG working?
ESG has become increasingly controversial in recent months as many question whether the concept is driving the right outcomes or even makes sense in an investment context.
Boston Consulting Group and business school INSEAD recently published a study suggesting 70% of directors lacked confidence in their ability to integrate ESG consideration into their company strategies.
Meanwhile, other academics argue investor pressure is a better way of convincing companies to improve their attention to ESG.
The survey adds to the growing evidence that there is much to learn and much to settle in the pursuit of ESG objectives in business strategy. Sadly, there is little time to do it. This new study may help things along the way.