Meridian’s 2021 Study of ESG Metrics in Incentive Plans provides current information and data on the prevalence of environmental, social and governance (ESG) metrics used in incentive plans of 315 large U.S. public companies (“Study Group”).
Background
In recent years, companies have become increasingly focused on addressing ESG issues. Shareholders, employees, communities, politicians and others have called for companies to incorporate ESG matters into their business strategy.
Companies often pointed to annual sustainability or corporate social responsibility (CSR) reports and increased disclosure on ESG accomplishments and commitments to address investor and other stakeholder questions and concerns. Most companies have stopped short of formally including ESG measures as a weighted measure in incentive compensation plans for senior executive officers. However, growing interest in ESG issues among major investors has sparked ongoing boardroom discussions on whether ESG metrics should be included in incentive plans, and if so, how best to do so. This report will help inform and support those discussions.
Study Scope and Development of Study Group Statistics
We primarily gathered ESG data from each Study Group company’s most recently filed annual meeting proxy. We used our judgment to determine whether a disclosed performance metric was an ESG metric and whether the performance metric fell under the E, S or G category. We also used our judgment to develop two levels of sub-categories under each of the E, S and G categories and to assign disclosed ESG metrics to an appropriate sub-category. See Appendix for categories and sub-categories of all of the various ESG metrics that we analyzed.
Study Group Characteristics
Each of the 315 companies in the Study Group was a component company of the Standard & Poor’s 500® Index¹ (“S&P 500®”) on December 31, 2020 (see Appendix for list of Study Group companies). The Study Group companies cover each major industrial sector of the S&P 500, with median revenues and market capitalization nearly identical to the median revenues and market capitalization of the S&P 500® (see table below).
Overview of ESG
ESG is an umbrella term for the environmental, social and governance issues that investors and other stakeholders believe are material to a company’s business. Historically, these issues were distinct from a company’s strategic and financial objectives. However, in recent years, ESG matters have become a focal point for investors and other stakeholders who are seeking to assess operational risks associated with a company’s business.
The environmental pillar of ESG focuses on how a company’s business impacts the environment and the communities in which it operates. Environmentally sensitive businesses (such as mining and oil and gas) have traditionally reported on employee safety and environmental incidences. As institutional investors have identified climate change as a significant risk, companies are increasingly pressured to disclose their progress towards broader sustainability metrics, such as carbon footprint and greenhouse gas emissions.
The COVID-19 pandemic, and the broader societal focus on diversity, equity and inclusion, have increased pressure on companies to consider initiatives under the social pillar of ESG. The social pillar includes issues related to human capital management, workplace health and safety, and product safety, quality and brand (i.e., customer satisfaction and product quality).
The governance pillar has traditionally covered a company’s organizational structure and legal processes. During the last 20 years, investors have developed widely-accepted best practice standards for corporate governance. In recent years, as ESG has evolved to include matters posing strategic/operational risk or potential reputational harm, the governance pillar has expanded to include cybersecurity, data privacy and business ethics.
¹The S&P 500® Index is a registered trademark of S&P Dow Jones Indices LLC, a division of S&P Global, Inc.
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