Companies highlighted new climate ambitions
Nearly 80% of Fortune 100 companies disclosed in their proxy statement initiatives or commitments related to climate risk, with half of those disclosing climate-related key performance indicators such as GHG emissions or intensity reductions and attaining carbon neutrality goals. A majority (57%) of companies this year also disclosed greenhouse gas reduction goals in the proxy, up from 35% last year. Notably, one-third of Fortune 100 companies highlighted goals or ambitions to achieve carbon neutrality or net-zero greenhouse gas emissions by 2050 or sooner, in line with the goal of the Paris Agreement. Just 8 percent highlighted such goals in their 2020 proxy statements.
Companies committed to increased transparency around workforce diversity
Just over 90% of Fortune 100 companies disclosed in their proxy statements initiatives or commitments related to workforce diversity, up from 61% last year. Nearly 40% disclosed related performance metrics such as diverse representation in leadership, and 23% disclosed specific goals related to advancing workforce diversity. Particularly noteworthy this year is that 48% either disclosed their commitment to publish or said they already publicly report EEO-1 aligned data. Among the investors we spoke with last fall who are engaging companies on workforce diversity matters, most said they want disclosure of EEO-1 data at a minimum to help ensure comparability.
Proxy statements are not the primary vehicle for communicating environmental goals and performance. Publishing a sustainability report has become standard practice for large companies, and last year the SEC introduced new requirements for registrants to provide disclosures about human capital in their 10-K filings. Notably, nearly 90% of Fortune 100 companies cited in their proxy various current or upcoming ESG-related reports and sections of the company website where investors could find more information. Therefore, this report’s data may understate, for example, the number of Fortune 100 companies making net-zero commitments or committing to disclose their EEO-1 data. This report’s findings show that many companies are voluntarily highlighting their ESG efforts, performance and goals in the proxy statement to address critical areas of investor interest.
Growing focus on integrating ESG into executive pay
As companies prioritize the development and communication of ESG strategies, boards, and particularly compensation committees are weighing whether and how to align key ESG goals to executive pay to incentivize management. Our review found that two-thirds of the Fortune 100 either currently incorporate ESG considerations into the executive compensation program or have made changes to do so in the coming year, up from about a half last year.
Workforce diversity was the most cited ESG pay consideration. A majority (52%) of companies disclosed diversity-related considerations in incentive pay decisions, such as diverse leadership representation, diversity metrics across the workforce, supplier spend with diverse firms, support for racial equity and inclusion in the communities in which the company operates, and Black employees’ engagement scores. Only 20% of companies specifically cited climate-related considerations related to incentive pay, including factors such as GHG emissions or intensity reduction, pursuing science-based targets for carbon reduction, investing in low-carbon technologies and increasing renewable energy use.
Other companies more generally reported that the company is currently or will in the future consider ESG or corporate responsibility in incentive pay decisions, which may include diversity and inclusion, climate-related and other environmental factors. An additional handful of companies (4%) disclosed that the compensation committee is actively exploring the feasibility of integrating ESG into the executive pay program.
How companies are incorporating ESG into executive pay is taking different forms. Some common approaches we’re seeing are incorporating ESG factors into strategic and leadership pay goals, assigning a weighting to ESG factors in annual incentive plans, or using an ESG pay modifier. Our review found that only 5% of companies disclosed ESG metrics used to determine pay.
Amid the trend toward integrating ESG into executive compensation decisions, some are urging caution, noting that pay goals can lead to unintended consequences and that the right metrics may be challenging to define and assess. ESG measures should be sufficiently specific and relevant to the company’s overall strategy. Robust processes and controls must serve as a foundation to help ensure that ESG metrics are reliable.