Stakeholders increasingly demand higher commitment from companies to make meaningful progress on sustainability. At the same time, regulatory pressure rises. For example, with the counterproposal to the corporate responsibility initiative, as of the annual general meeting 2024, i.e., for the financial year 2023, Swiss listed companies will be obliged to hold a shareholder vote on their sustainability report.
While some companies are starting to act, stakeholders including investors and proxy advisors have already expressed dissent over corporate ambition levels at companies’ say-on-sustainability votes in the 2021 and 2022 proxy seasons.
One way to show commitment to internal and external stakeholders and avoid criticism regarding “greenwashing” and low credibility is to reflect environmental, social, and governance (ESG) performance in executive pay decisions. In fact, companies are increasingly integrating ESG topics in short-term incentive plans (STI).
A 2021 study conducted by the HCM presided Global Governance and Executive Compensation Group (GECN) found that among over 500 international companies, 71% use ESG in their STI (2020: 66%).
In comparison, listed companies in Switzerland are still lagging with only 42% of the 100 largest companies in the Swiss Performance Index (SPI) reflecting ESG in pay decisions. At the same time, 75% of companies in the Swiss Market Index (SMI), comprising the largest and most liquid 20 Swiss stocks, integrated ESG in their STI in 2021. The average weighting of these criteria within the respective STI makes up for 28% on a global level and 24% for SMI companies.
However, the prevalence of integrating ESG in incentive plans can vary significantly by industry. For example, while in the materials, financial, utilities and energy sectors, ESG can be observed in most incentive plans (approx. 90%), companies active in consumer discretionary and information technology do not integrate them as often yet (only approx. 55%).
Also, given the different ESG focuses and challenges of companies and respective industries, ESG metrics vary quite significantly. Globally, among the most common topics are social criteria (64%) such as diversity & inclusion or employee engagement, governance criteria (39%) such as risk management or compliance, and customer focused criteria (31%) such as customer satisfaction or product quality and safety.
