Majority of employers tying ESG metrics to executive pay

A majority of employers are tying ESG (environmental, social and governance) metrics in compensation plans for CEOs or other named executive officers (NEOs), according to a new report.

Specifically, 67% of companies in the TSX60 index and 80% of CEC40 companies (which have been identified by Climate Engagement Canada for being among the country’s top carbon emitters) disclose the use of one or more ESG metrics in these compensation plans, according to law firm Fasken.

Disclosing the use of ESG metrics in executive compensation plans is common among companies in the following industries:

• transportation and environmental services (100%)
• conglomerates (100%)
• oil and gas (93%)
• metals and minerals (92%)
• financial services (91%)
• utilities - gas/electrical utilities (75%)
• merchandising (67%)

But it’s an uncommon practice in the industrial products - technology (20%) industry.

An increase in employers’ ESG investment leads to higher profits, according to a previous report.

Integrated approach

Among companies that disclose ESG metrics in executive compensation plans, 50% of TSX60 companies and 55% of CEC40 companies also have ESG metrics incorporated in with other types of metrics (e.g., such as customer experience) rather than being separate ESG metrics.

Fewer list ESG separately, but generally without distinguishing between E&S (29% and 15%, respectively), have E-related issues only (21% and 24%, respectively) or S-related issues only (26% and 31%, respectively), according to the Fasken report.

Also, 64% of TSX60 companies and 78% of CEC40 companies have ESG metrics tied to short-term incentive compensation, such as annual bonuses or other short-term incentives. Fewer have it tied to long-term compensation (30% and 39%, respectively).

ESG brings a lot of benefits to employers. Employers with high-level ESG scores are rated as attractive by both employees and potential future hires, according to a previous report.

Objectives of ESG reporting

Of the TSX60 and CEC40 companies disclosing an "E" or "S" objective — other than targets related to greenhouse gas (GHG) emissions — the percentage of companies disclosing specific objectives are:

• community engagement (55% of TSX60 companies and 59% of CEC40 companies)
• waste management (55% and 49%)
• air pollution (both 45%)
• water consumption (41% and 60%)
• renewable energy use (42% and 52%)
• Indigenous engagement and reconciliation (38% and 32%)
• biodiversity and ecological impacts (30% and 35%)
• employee retention (28% and 30%)
• pay ratio (11% and 9%) 
• deforestation (8% and 9%)

For companies identifying "S" initiatives, other than diversity, equity and inclusion (DEI), the focus has been on the following stakeholders or initiatives:

• community development and relations (88% of TSX60 companies and 91% of CEC40 companies)
• employees (86% and 89%)
• Indigenous engagement and reconciliation (80% and 78%)
• philanthropy (both 69%)
• customers (51% and 50%)
• others (8% and 12%)

A high ESG metric score is not just a parameter to measure the impact of one's corporate responsibility with its people and the planet. It is also a data-driven approach to strengthen a company's branding, noted Sir Winston Malapad, HR digital technology director/talent acquisition director for process excellence and analytics, Sitel.

“An employee’s perception [of] their work's impact has always been important. This encourages them to support anything that promotes social responsibility,” he said. “Working with the company nowadays is not just about [competitive] pays nor enticing perks. It's all about choosing a company that promotes a sustainable planet for their people, not just to thrive, but also to fulfill their sense of purpose.”