Environmental, Social, and Governance (ESG) criteria are a set of standards for corporate operations and behavior which are used by socially conscious investors to screen investments.
Once considered a niche investment field, there has been a growing effort for a more mainstream incorporation of ESG factors into investment practices. The largest institutional investors have now publicly committed to incorporating ESG risks into investment decisions and shareholder voting policies. The growing emphasis by investors on ESG factors has created downward pressure on companies to provide disclosures as to how ESG factors are being incorporated into business and operational decisions.
Rather than simply encouraging disclosure, institutional investors are rapidly incorporating climate risk mitigation and improvements in workforce inclusion and diversity into long-term performance evaluations for their investment holdings. This includes encouraging companies to consider linking executive pay to ESG performance.
An Evolving Field
Efforts to tie executive compensation to ESG or Diversity, Equity, and Inclusion (DEI, or D&I) performance are in their relative infancy. There is considerable debate over improving disclosures, best practices, appropriate metrics, portion of incentives tied to such goals, and more.
The trend will be toward greater disclosure of quantifiable performance over time. Further, the effort to encourage disclosure has expanded from investors to regulators. The SEC is considering significant enhancements to disclosure rules on climate risk, D&I, and HCM.
