WTW: ESG to factor strongly in 2024 executive pay plans despite pushback

Employers will continue to tie their executive compensation programs to environmental, social and governance, or ESG, factors in 2024 despite growing opposition to corporate ESG initiatives, WTW consultants said during a virtual presentation Thursday.

“ESG is here to stay — that’s a pretty strong consensus across the governance community,” said Don Delves, WTW managing director and the company’s executive compensation and board advisory leader for North America. “However, most boards and companies are focusing more on what key elements of ESG and other non-financial metrics are most important, most relevant and hold the most strategic value for their company and their industry.”

Delves said the “social” part of the ESG acronym is receiving increased attention from U.S. boards, specifically with respect to human capital. Many boards are concerned about the care and condition of their employee populations, he added. “As a result, boards are asking much more in-depth, tougher questions about human capital, and I would expect that to continue.”

Early 2023 research from the Conference Board suggested that the majority of U.S. companies expected backlash against ESG practices to intensify in the short term. One example came in March, when a group of state governors opposed the Biden administration’s final rule that would allow retirement plan fiduciaries to consider ESG factors when making plan investments.

Still, a sizable number of employers appear committed to ESG. A February report by law firm Seyfarth found that the number of disclosures which referenced broad-level oversight of human capital issues increased across all industries between 2022 and early 2023.

ESG also has been the subject of regulatory interest. At the federal level, the Securities and Exchange Commission is seeking to implement a climate risk disclosure requirement. In October, California enacted two climate disclosure requirement laws with some provisions set to take effect as early as 2026.

Internationally, employers may need to comply with the European Union’s Corporate Sustainability Reporting Directive, which requires companies with revenue of 150 million euros and above to disclose certain ESG information including climate-related information, Michael Siu, senior director, executive compensation and board advisory at WTW, said Thursday.

Executive compensation plans incorporate ESG metrics in a variety of ways, and the inclusion of certain metrics may pose a greater risk of reputational harm or litigation than others, Siu added.

For example, diversity, equity and inclusion metrics that are assessed qualitatively as part of a larger “bundle” of ESG metrics are lower risk, he said. Conversely, DEI metrics that are assessed quantitatively — such as a goal stating that a company seeks a certain percentage of racial or ethnic representation in management — pose greater risk.

“Of course, investors prefer quantitative metrics and those that are outcome-based over those that are activities-based and assessed qualitatively,” Siu said. “This suggests that companies will need to strike a balance between the risks they are able to tolerate versus having metrics that are meeting the preferences of investors.”

DEI efforts have faced their own share of backlash in 2023, leading some companies to refine their understanding of diversity, said Rachael McCann Jones, senior director, global DEI solutions at WTW. Beyond demographic diversity, employers are also considering diversity of skills and experience, as well as behavioral diversity.

“This becomes really important as we think about how our organizations evolve their DEI strategy going forward,” Jones said. “Those who have been focused on DEI continue to be resolute that they will.”