Half of Boards Discuss ESG Regularly: Pearl Meyer Study

As environmental, social, and governance (ESG) issues become more important to key stakeholders such as investors and customers, boards are taking differing approaches to address the issue formally, according to a recent survey of executives and board directors by Pearl Meyer.

ESG was a top concern among 60 percent of survey respondents. Approximately half (48 percent) of respondents said ESG issues are discussed regularly by board committee members, or even by the full board in some cases. Half (51 percent) said ESG issues are aligned with their company’s business strategy, and two fifths (40 percent) said they are aligned with their business goals.

“The type of industry you’re in and whether or not you’re global affects where you are on this whole ESG continuum,” says David Seitz, managing director at Pearl Meyer.

Much of the board focus on ESG is being driven by customer and shareholder sentiment. According to the survey, 58 percent believe their customers are interested in this area, while 46 percent said their investors are interested as well.

Some companies are also looking at ESG from a talent and recruiting standpoint, as the issue is important to some millennial-aged employees, says Seitz. “They want to know that they are working for a company that thinks about ESG issues and is committed to them,” he says.

Some respondents report that their companies are using specific ESG-related incentive metrics. In fact, more than 18 percent of companies polled said they have a specific executive who is focused on ESG. Of these companies, 36 percent include ESG-related metrics in their incentive program.

Interestingly, 29 percent of these companies with an ESG executive said they were unsure whether they were using these metrics in incentive plans.

The actual number of companies using ESG-related metrics in incentive plans may be underreported, as some companies do not specifically label their metrics as ESG, says Seitz. “Companies in certain industries—manufacturing, extractive industries, obviously where there is more of an environmental impact risk or worker safety issues—they’ve included health and safety metrics in their [annual] incentive plans, both for the [chief] executive and management for many years,” he says.

The first logical step in using ESG metrics is by incorporating them in the annual incentive plans, says Seitz. “If you want to send a message … then you can incorporate those metrics into the [annual] scorecard,” he says. “The MBO [management by objectives], non-financial portion of the incentive scorecard is a perfect category to incorporate some of these ESG metrics, and that would work for companies in most industries,” he says.

“Companies must invest the time to define ESG metrics and how these metrics link to financial results. This takes time and energy, but it is a critical success factor in order to imbed ESG in the business. Further, well-defined ESG metrics may then be incorporated into incentive plans, and the natural starting point is the annual incentive plan," Seitz says.

Meanwhile, other companies are taking a more indirect approach in linking their pay plans to ESG initiatives. Seitz says some of these companies are not using explicit ESG metrics, but detailing how these issues impact their financial results, such as net income or operating costs.

“A lot of these ESG metrics, when you talk about it in a value sense, they really do flow through to the income statement,” he says. Seitz explains that companies could show their commitment to ESG issues by constructing their case for how they affect the financial results of the company. “Whatever metrics the company chooses … they can go on to articulate ... how the ESG metrics impact those financial numbers,” he says.

The most common way that companies are acknowledging ESG issues is by reporting on them in an internal manner, says Pearl Meyer. “Companies are also reporting publicly and/or embedding certain ESG factors into their business operations,” the report says.