Slice and Dice Company Data on New ESG Tracker™

No longer are we tracking whether companies are using ESG measures but how? Farient Advisors’ ESG Tracker™ now provides insights into executive incentive plans for all-size companies and industries. At this moment when it seems attention on ESG issues—both from proponents and opponents—is at an all-time high, it’s incumbent on companies and their leaders to assess how their competitors and peers are addressing stakeholder concerns.

These companies are at the forefront of identifying ESG risks and opportunities, linking those to drivers of long-term value creation, and incorporating such factors into their corporate strategies. Similar to the use of financial metrics in bonus plans, ESG metrics are being added to incentive plans to both motivate employees and let stakeholders know that the company is committed to advancing strategic priorities; in the context of ESG, such priorities may include addressing the company’s climate impacts or improving workforce diversity.

Overall, 61% of S&P 1500 companies currently use an ESG incentive measure. When broken down by size, we see larger companies are more likely to use such measures than smaller firms—76% of large cap S&P 500 companies versus 59% for the S&P MidCap 400 and 49% for the S&P SmallCap 600. Differences in adoption by company size are due to key differences in external pressures (e.g., from investors and other stakeholders), the availability of internal resources (e.g., funds to hire a chief sustainability officer or the like), and company maturity.

 

Prevalence of ESG Incentive Measures for S&P 1500

Major differences in the types of ESG measures companies are using are also noteworthy. Social measures, such as those tied to workforce diversity or employee health and safety, are the most common type of ESG metric with 84% prevelence (among companies with ESG measures). Environmental measures come in second with 62% prevalence. Notably, environmental metrics have experienced a strikingly rapid rate of adoption, rising from 33% in 2021 to 62% today. Many companies and their stakeholders have sought to address climate-related issues by committing to certain targets (e.g., Net Zero by 2050) and then tying executive incentives to meeting those targets under interim one-year or three-year goals; this trend has accelerated in the past couple of years.

Measures relating to customers (34% prevalence), governance (22%) and community (13%) round out the remaining metric types, and have stayed relatively stable over the past three years. When companies adopt ESG measures, they will often use multiple measures that may span two or more of the aforementioned ESG categories depending on what is considered relevant and material for the company and their industry.

 

Prevalence of ESG Measures by Type

Among S&P 1500 Companis Using ESG Measures

 

There are differences in ESG metric adoption by sector. Utilities and Energy companies for instance have the highest prevalence at 96% and 85%, respectively (among S&P 1500 companies); companies in these sectors have long used measures tied to employee safety and have faced some of the greatest pressures from investors and regulators to address environmental impacts. Meanwhile, the Information Technology sector has the lowest prevalence of ESG metric use at 43%, but it has seen significant uptake in recent years as these companies increasingly face similar external pressures to address workforce diversity and the climate impacts of their operations.

 

ESG Tracker™ Uncovers HanesBrands First ESG Measures

HanesBrands, a small-cap company in the S&P 600 index, adopted ESG incentive measures for the first time in 2022 through the addition of a diversity, equity, and inclusion (DEI) modifier in its STI plan. The modifier can adjust the short-term incentive (STI) payout up or down by 5% depending on performance against workforce representation targets.

In 2022, despite achieving 19.1% People of Color representation in its U.S. workforce for senior manager levels and above—a 2.9% increase over 2021—HanesBrands chose to exercise negative discretion and not apply the calculated +2% modifier to the STI payout given lagging 2022 financial performance.

Discover Evolving ESG Inventive Trends

Whether your company already uses ESG measures or is preparing to, it is instructive to see how other companies are adopting such measures. Visit the Farient ESG Tracker™ each week to discover new trends and analysis on ESG incentives and contact Farient Advisors if you have any questions.