2021 Use of Environmental, Social, and Governance Metrics in Incentive Plans

Increased investor and stakeholder interest in Environmental, Social, and Governance (ESG) topics has led to increased focus on ESG among public companies. One approach for signaling the importance of ESG externally is to incorporate ESG metrics and goals into executive incentive plans. Against this backdrop, FW Cook studied current practices among the largest U.S. public companies with a focus on:

1. Prevalence of ESG metrics within executive incentive plans in the broader industry and amongst industry sectors
2. Types of ESG metrics
3. Approaches to incorporating ESG into incentive plans

Key Findings Include:

• 64% of large companies disclose ESG metrics in incentive plans (up from 56% in 2020). The vast majority of these companies incorporate ESG metrics in the annual incentive plan, but a few also incorporate ESG in a long-term incentive plan
• ESG use in incentive plans varies significantly by industry and is most prevalent among companies in the Energy, Utilities, Financials and Health Care sectors (>70% prevalence) and least prevalent among companies in the Communication Services and Industrials sectors (50% prevalence). In the past year, there was significant growth of ESG prevalence in the Consumer Discretionary sector
• The types of ESG metrics employed vary by industry. Environment & Sustainability metrics are most common among the Energy and Utilities sectors while Human Capital & Culture and Diversity & Inclusion metrics are most common among the broader industry
• Similar to last year’s findings, most companies use an ESG metric as one of many factors considered in evaluating individual or team-wide performance; however, this year we also observed an increase in the number of companies using ESG metrics as stand-alone, formulaic metrics/modifiers (34% in 2021 comparedto 22% in 2020)
• Companies continue to disclose performance against the ESG incentive metrics qualitatively, with less than one-fourth of companies that use ESG incentive metrics disclosing quantitative performance achievement