Companies globally are increasing the use of ESG factors in their executive compensation programs, with more than 80% of incentive plans now incorporating at least one ESG metric, and the integration of environmental metrics rising particularly rapidly, according to a new study released by professional services and solutions provider WTW.

For the study, WTW’s fourth annual Report on ESG Metrics in Executive Incentive Plans, WTW reviewed the public disclosures from over 1,100 listed companies across North America, Europe and Asia Pacific.

The study found that 81% of companies are now using ESG metrics in executive incentive plans, up from 77% last year, and only 68% in 2020. By region, while Europe leads on the integration of ESG factors, with 93% of companies now using at least one factor, the increase in the use of ESG metrics has been particularly fast in the U.S., with 76% of companies incorporating ESG in executive incentive plans in 2023, up from 69% in 2022, and from only 52% in 2020.

In Asia Pacific, while 77% of companies that disclose incentive metrics reported using ESG factors, practices varied widely my market, ranging from 93% of companies in Singapore and 86% of in Australia, to less than 30% in China.

By category, the study found that social metrics were the most frequent ESG factor included in executive incentive plans, with human capital metrics by far the most common across all categories, used by 83% of companies in Europe, 70% in the U.S., and 57% in Asia Pacific.

While social categories remain the most prevalent, the use of environmental metrics in executive incentive programs has seen rapid growth, jumping to 44% of companies in the U.S. in 2023 from only 25% the prior year and more than tripling from 13% in 2020. Similarly, 50% of Canadian companies included environmental factors in 2023, up from 36% in 2022. The use of environmental factors was strongest in Europe, at 80% of companies, up from 65% the prior year, and 38% in 2020. Carbon emissions reduction was the most commonly used environmental metric across regions, used by 60% of companies in Europe and 27% in the U.S.

The study also found that the use of ESG metrics was most prevalent in short-term incentive (STI) plans, with 75% of companies in the U.S., 88% in Europe and 66% in Asia Pacific including ESG factors in STI programs, compared with only 9% of companies in the U.S., 56% in Europe and 30% in Asia Pacific using ESG in long-term incentive (LTI) plans. The use of ESG metrics in LTI plans has been increasing, however, nearly tripling since 2020 in the U.S., and rising from only 21% in Europe.

Richard Belfield, Executive Compensation & Board Advisory Practice leader at WTW, said:

“Companies’ interest in tying executive incentive plans to ESG measures is showing no signs of abating. In fact, companies in some industries such as IT and consumer goods that have previously shied away from using ESG measures are now joining in with the wider trend and have narrowed the gap with other industries. The ongoing growth we are seeing reflects the continued focus from companies across markets and countries to articulate to stakeholders how ESG priorities are embedded in their business strategy and how they are used as a key measure of non-financial performance.”

Click here to access the study.