News analysis
ESG-friendly firms pay higher salaries
Managers and executives working for firms with good environmental, social and governance (ESG) practices are paid better than those working in firms with poor ESG.
The UK and Europe have the most corporate executives benefitting from progress in environmental, social and governance (ESG).
Australian firms still rank highly according to the latest research firm Guerdon Associates. In comparison, firms in Singapore and the United States continue their record at the bottom of the list.
88% of top companies now tie financial incentives to ESG, up from 68% in 2020.
What’s going on?
It is common nowadays for companies to tie at least some executive compensation to their ESG metrics.
Essentially, a good ESG record means more compensation for executives, and a lousy record means less.
The metrics can vary, but common examples include waste reduction, product quality, climate impact and employee satisfaction.
While Australia has historically had the most companies that do this, the latest figure shows Europe has taken the lead – the culmination of three years of exceptional growth. This is also true for the United Kingdom.
88% of Europe’s top companies now tie financial incentives to ESG, up from 68% in 2020. The UK stands at 87%, up from 66% in 2020. Australia, meanwhile, stands at 85%, up from 77% in 2020.
“The big change has been towards the environment and climate change,” Guerdoin said,
“Half of the companies with ESG measures in incentive plans incorporate an environmental measure.”
What does this mean for ESG in Europe?
In short, firms that embrace good ESG pay the most.
Executives who preside over positive ESG records are now more likely than ever to see a financial reward for their efforts.
The UK and Europe are getting serious about the values of ESG – climate change in particular, which will dominate lawmakers’ agendas for decades as the UK and the EU work towards carbon neutrality by 2050.
Because of this, it doesn’t look like the rewards for good ESG reporting will slow down soon.
ESG is a driver of long-term success, and shareholders respect that.
Why tie executive incentives to ESG?
Because ESG commands a lot of respect in the corporate world.
Analysts recognise it as a driver of long-term success, and shareholders respect that. In addition, most consumers and clients will carry a strong appreciation for ESG values.
The combined interest means over $40 trillion in investment is now tied into ESG initiatives across the globe.
To impress these people, companies need to ensure they are doing ESG right, so they incentivise their top executives with financial gains if they can make this happen.
Does it work?
Usually, yes. The fact that it is so popular speaks for itself. The number of top companies that embrace ESG and pay better salaries continues to increase across the major global economies.
Out of the UK, UK, US, Singapore, Canada, South Africa and Australia, only Canada has seen a decline in participating countries this year, yet still had an upward trend until 2021.
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