Subodh Mishra is Global Head of Communications at Institutional Shareholder Services (ISS) Inc. This post is based on an article by Rachel Hedrick, Associate Director, and Kevan Marvasti, Associate Vice President, with ISS’ Governance Research & Voting unit. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) by Lucian Bebchuk and Roberto Tallarita.
Overview
While market participant viewpoints on environmental and/or social (E&S) metrics in executive incentive programs have been and continue to be mixed, the prevalence of such metrics in public company executive incentive programs has continued to grow over the past few years. An ISS Corporate Solutions study showed that by June 30, 2021, approximately 20% of the S&P 500 Index had incorporated at least one E&S metric into their incentive programs. At the end of calendar year 2022, ISS data showed that 35% of the S&P 500 used at least one stand-alone E&S metric. This percentage would be even higher if it also included the number of companies that incorporated environmental or social performance into executives’ individual objectives or strategic goals.
Adoption of E&S Metrics
Energy Companies were Early Adopters and Continue to Use E&S Metrics
E&S metrics are now seen across all industries but some of the earliest adopters in the U.S. market were energy companies. The use of E&S metrics aligns with the greater potential impact such companies can have on the environment and the various business risks and opportunities that may be associated, as well as the necessary focus on worker and community safety. For purposes of this article, we have examined disclosure for S&P 500 companies within the 1010 GICS industry group. This GICS industry group incorporates both Energy Equipment and Services as well as Oil, Gas, and Consumable Fuels. See the Appendix for a full list of included companies.