In a previous article written by 21st Century titled South Africa Stands Tall on ESG amongst Global Peers – Part 1, 21st Century (representing Africa) was part of a worldwide study of ESG metrics conducted by the GECN Group of companies covering 5 continents 8 listed exchanges (South Africa is the only emerging market exchange). In part 1, South African listed companies stand tall amongst the developed nations in our adoption and application of ESG metrics. We explore which industries can stand tall in Part 2 of the study.
This year’s GECN research 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 the 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.
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 using such metrics.
The most substantial rise of ESG metrics can be seen in sectors which 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 is evident ranging between 91% (Materials) and 56% (information Technology) now using ESG metrics in their incentive plans as shown in figure 1.
Figure 1: Percentage of companies using ESG metrics in incentives by sector
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 COVID-19 pandemic. There have been furloughs, lay-offs, salary cuts, salary freezes and forced utilisation 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.
Figure 2 shows the highest prevalence of Diversity, Equity and Inclusion (DE&I) metrics (45%) followed by Employee Engagement metrics (37%)
Figure 2: Percentage of companies using Social Metrics by type of sub-metric
Globally, 30% of companies in the sample use Environment metrics in their incentive plans. The growing interest on “Say-On-Climate” will mean that 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 organisations up and down the value chain and has a knock-on effect across industries.
Figure 3: Percentage of companies using Environment metrics in incentives by Sector
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%. Behaviours, 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 in figure 4.
Figure 4: Percentage of companies using Governance Metrics by type of Sub-Metrics
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 that the world sorely needs to ensure sustainability outside of the pandemic influence.
Chris Blair, B.Sc Chem. Eng., MBA – Leadership & Sustainability, CEO – firstname.lastname@example.org
Bryden Morton, B.Com (Hons) Economics, Executive Director – email@example.com
About 21st Century:
21st Century, a level 2 BBBEE company, is one of the largest Remuneration and HR consultancies in Africa, with a team of more than 60 skilled specialists, servicing over 1700 clients – including non-profit organisations, unlisted companies, government, parastatals and over two-thirds of the companies listed on the JSE. 21st Century offers bespoke business and strategy planning services, operating model and organisational design, creative reward practice modelling, change, stakeholder and culture management, training courses and comprehensive human capital and talent plans. These are all underpinned by our analytic and survey capability tailored to the African environment. 21st Century continues to offer solutions via a combination of virtual channels and on-site presence.
21st Century has expanded its services to offer a full turnkey sustainable business and remuneration service. Beyond remuneration and reward consulting, 21st Century offers local analytics for business advantage; remuneration and HR training; change management services; talent and people solutions; and end-to-end organisational design and development.