Integrating ESG issues into executive pay

The company dialogue and research highlights that the integration of ESG issues into executive pay is in its infancy and there is considerable scope for investor engagement to improve practice and disclosure across all sectors.

Integration is hindered by the lack of a universally accepted standard of reference for boards, senior executives and remuneration consultants to assess relevant ESG risks and opportunities. Work underway by key organisations such as the Sustainability Accounting Standards Board (SASB) will provide more guidance in this area.

To successfully integrate ESG issues into executive pay, a holistic approach towards sustainable performance is needed to avoid creating incentives in isolation and avoid further complicating remuneration reports, which are often already lengthy and complex.

To advance this work in the future, additional information is required:

an in-depth analysis between companies f public reporting of material issues and ESG factors integrated into pay;
better reporting by companies on ESG targets, performance against those targets and actual impact on pay.

Despite these challenges, there is room for investors to engage with companies to ensure that incentives are aligned with long-term strategic plans, and to ensure that this information is clearly disclosed. Engagement can help to ensure that senior management is held accountable for sustainable performance and sustained shareholder value.