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Tying Sustainability Metrics to Executive Compensation

Energy and utility companies lead the way in tying sustainability metrics to executive compensation, while telecommunications, technology and cyclical consumer goods and services companies trail behind

Gary Hewitt
Head of Research
GMI Ratings

GMI Ratings, a leading provider of research, data and analytics on environmental, social, governance (ESG) and forensic accounting risks affecting the performance of public companies, has released a study titled, Sustainability Metrics in Executive Pay. The study examines how sustainability metrics, such as environmental, health, safety, product and labor concerns, are being integrated into executive compensation practices.

Institutional investors are increasingly integrating ESG factors into their investment decision-making, driven in part by the UN Principles for Responsible Investment (PRI), which has more than 1,200 signatories worldwide representing over $34 trillion in assets under management. Additionally, investors are placing greater importance on sustainability factors, including the linkage of sustainability performance metrics and executive compensation. Simultaneously, companies are focusing more on sustainability issues, stemming in part from concerns expressed by investors, regulators and other stakeholders. 

Key findings from the study, include:

  • A slim majority of S&P 500 companies (53.8 percent) cited at least one sustainability factor in shaping pay decisions;
  • While a majority of companies in the S&P 500 incorporate sustainability factors into executive compensation decisions, only 16 percent name specific metrics used to measure performance; and
  • Over 90 percent of energy and utility companies use sustainability metrics to determine a portion of pay, compared to less than 40 percent of telecommunications, technology, and cyclical consumer goods and services companies.

“While corporate boards, particularly in sensitive industries like extractives, are more closely linking executive pay to sustainability performance metrics, our research shows much room for improvement,” said Gary Hewitt, GMI’s head of research. “With shareholders increasingly considering how portfolio companies are managing ESG-related risk, we believe boards will begin using more quantifiable metrics and targets to assess sustainability performance.”

The study findings were derived from GMI’s ESG research, ratings and data, which helps investors evaluate and address potential ESG risk. The company’s ESG coverage spans 6,400 companies worldwide, and the ratings are based on 150 ESG KeyMetrics® that are most material to company performance.

About GMI Ratings
GMI Ratings
is the leading provider of research and ratings on environmental, social, governance (ESG) and accounting-related risks affecting the performance of public companies. The firm’s ESG ratings on 6,400 companies worldwide incorporate 150 ESG KeyMetrics® to help investors assess the sustainable investment value of corporations. The firm also provides Accounting and Governance Risk (AGR®) ratings on more than 20,000 public companies worldwide. Clients of GMI Ratings include leading institutional investors, banks, insurers, auditors, regulators and corporations seeking to incorporate accounting and ESG factors into risk assessment and decision-making. A signatory to the Principles for Responsible Investment (PRI), GMI Ratings was formed in 2010 through the merger of GovernanceMetrics International, The Corporate Library and Audit Integrity. In the 2012 Independent Research in Responsible Investment (IRRI) Survey conducted by Thomson Reuters Extel and SRI-CONNECT.com, GMI Ratings was named “The Best Independent Corporate Governance Research Provider.” 

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