More Employers Including ESG Investments in Executive Compensation, Retirement Programs

A survey by Willis Towers Watson found that while only 27% of employers currently include environmental, social and governance (ESG) investments in their executive compensation programs, that is slated to double to 54% in the next three years.

“Pressure has been mounting for companies to demonstrate a commitment to ESG,” says Heather Marshall, senior director, executive compensation, Willis Towers Watson. “Some investors are becoming increasingly vocal on environmental issues, while the pandemic and social unrest are accelerating the focus on social issues by many boards. This is driving companies to consider incentive plan metrics that link variable pay outcomes to the successful execution of ESG aspects of their business strategies.”

Interest in ESG is starting at the corporate level, as more companies are learning that applying these principles to how a company is run can lead to higher profits over the long term, Charles Nelson, chief executive officer of retirement and employee benefits at Voya, tells PLANADVISER. “On a global basis, you see the data quite clearly spell this out,” Nelson says. “We are bit behind in the U.S.”

After considering their bottom-line profits, companies are turning to ESG in their retirement and executive compensation plans, he says. “It would be inconsistent for them to run their business one way and to treat their employees differently in their benefits program.” Nelson says 30% of Voya’s clients are offering ESG investments in their retirement plans, either as a standalone investment or as an element of a target-date fund (TDF).

“This is only a small percentage of total assets, but we think that will grow over time, particularly as a recent survey we did found that 76% of consumers think it is important to apply ESG to workplace benefits plans,” Nelson says.

Employers embracing ESG in their retirement plan that also have executive compensation plans are offering these types of investments in the latter, as well, as investment lineups in executive compensation plans often mirror retirement plans, Nelson says. “Academic research has found that investors believe ESG will create greater value over the long term, so they tend to be more patient about this kind of investing, Nelson says.

Don Delves, head of the executive pay consulting group at Willis Towers Watson, says his firm analyzed the proxy statements of S&P 500 companies a year ago to look for any measure of ESG investing in their executive pay programs. Willis Towers Watson found that 51% of these companies offered some type of ESG investment in their executive compensation programs.

Granted, Delves says, some of these are “soft” types of ESG investments, such as employee safety or customer satisfaction, but Willis Towers Watson researchers thought that the prevalence of ESG was interesting. The company is currently in the process of its 2020 analysis, which it will issue within the next few weeks, he says.

Delves says that while investors have been interested in governance issues “for decades,” environmental and social issues have been gaining traction only in the past few years. He points out that these are three very different issues. What appears to be of the greatest interest to investors, he says, is “human capital management. They are asking companies to be able to tell their human capital story, such as safe working conditions.”

Underscoring the importance of this, he continues, “about a year ago, the SEC [Securities and Exchange Commission] came out and said it would like companies to do a better job of reporting on human capital and other intangibles. We know that 70% of companies’ value is comprised of intangibles, and part of that is human capital. So, in essence, the SEC was asking companies to provide more poignant information about such things as inclusion and diversity, employee turnover, employee development and succession planning.”