Our thinking

Putting the ‘E’ in ‘ESG’

2 April, 2021

The FT reported this week that over half of FTSE 100 companies now link executive pay to ESG performance.

In many ways this is great news. Creating accountability at senior leadership level plays an important role in making sustainability part of the core corporate agenda. It also reflects the growing pressure companies face from investors around their performance on non-financial factors, which is another powerful driver of momentum.

And given improved performance on social and environmental issues leads to better financial performance, it is in many ways a no brainer.

So it’s a fantastic idea, in theory. But in reality, the extent to which it drives progressive change rests on how good the ESG metrics the pay is linked to are, and in many cases these still fall short.

In this instance, nearly half of the ESG measures used in judging the FTSE 100 CEO pay are not deemed ‘material’ to shareholder value, according to a report from London Business School and PwC.

This in turn is part of a broader problem with ESG metrics and reporting, and the lack of a clear and unified global framework for monitoring change.

So the question for any company linking pay to metrics has to be ‘what metrics?’ – rather than it being an automatic win for sustainability and success.

By Cara McEvoy