In a previous article titled ‘Executive pay: It’s no longer just about the money’, we mentioned that 21st Century (representing Africa) was part of a worldwide study of ESG metrics conducted by the GECN Group of companies covering five continents and eight listed exchanges (South Africa is the only emerging market exchange).

In this article, South African listed companies stand tall among the developed nations in our adoption and application of ESG (environmental, social and governance) metrics.

We explore which industries can stand tall in this part of the study.

Year-on-year trends

This year’s GECN research was aimed at examining any year-on-year trends in companies using ESG metrics in executive incentive plans (both the prevalence and weighting), particularly changes in connection with the Covid-19 pandemic and increasing market pressure for companies to increase their focus on ESG in their business strategies.

In general, our study confirms, across regions and sectors, greater and deeper use of ESG metrics in incentive plans – more than 50% of companies in all sectors reviewed use ESG metrics.

The financials, utilities and energy sectors continue to lead the way in the inclusion of ESG metrics in incentive plans.

The materials sector also saw a large increase in the use of ESG metrics, rising to become the market-leading sector in doing so.

The most substantial rise of ESG metrics can be seen in sectors that were stragglers in the prior year’s study, being health care, communication services, consumer discretionary and information technology.

While there continues to be significant differences across sectors, the global growth evident ranges between 91% (materials) and 56% (information technology) now using ESG metrics in their incentive plans as shown below.

Percentage of companies using ESG metrics in incentives by sector

Source: GECN Group

The Covid-19 pandemic resulted in a significant increase in the inclusion of workplace-related metrics in incentive plans. These metrics often include an assessment of how the company is adjusting towards the new working norm and implementing protocols for workplace safety, communication, engagement, and digital platforms.

Employees have borne the brunt of the pandemic. There have been furloughs, lay-offs, salary cuts, salary freezes and forced utilization of leave entitlements.

Despite being an important indicator of how management has dealt with the impacts of the pandemic on its staff, the number of companies with employee engagement metrics saw a significant decline.

The chart below shows the highest prevalence of Diversity, Equity and Inclusion (DE&I) metrics (45%) followed by Employee Engagement metrics (37%)

Percentage of companies using social metrics by type of sub-metric

Source: GECN Group

Globally, 30% of companies in the sample use environment metrics in their incentive plans. The growing interest on ‘say on climate’ means this lagging metric will grow more quicker than the rest. The energy sector leads the way with 78% using environment metrics, followed by materials (60%) and utilities (52%). Surprisingly, health care lags in this area at 16%.

The most profound sub-metric in the environment category is a supply chain overhaul.

This impacts many other organizations up and down the value chain and has a knock-on effect across industries.

Percentage of companies using environment metrics in incentives by sector

Source: GECN Group

The ‘G’ in ESG is being increasingly tied to topics of risk and reputation, with risk management showing the biggest change since 2020 from 40% to 49%.

Behaviors, ethics, values ​​and culture metrics lead the way in the governance metric with 51% of companies incorporating them, followed closely by risk management and then compliance metrics at 38%, a small reduction from the previous year as shown below.

Percentage of companies using governance metrics by type of sub-metrics

Source: GECN Group

Whether or not there will be global convergence on reporting standards incorporating ESG metrics in executive incentive plans is a clear signal to its stakeholders that the company intends to improve ESG performance, something the world sorely needs to ensure sustainability outside of pandemic influence.

Chris Blair is CEO and Bryden Morton executive director at 21st Century.



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