IN-DEPTH: FTSE 350 moves to weave ESG metrics into LTI plans
ESG metrics within incentive schemes now comprise nearly 50% of performance metrics at London's FTSE 350 index. And, as the U.K.’s largest companies move to embrace alternative metrics in their evaluation of CEO performance, more are linking such climate and social-focused criteria to long-term incentive (LTI) schemes.
According to Diligent Market Intelligence (DMI) data, the number of FTSE 350 companies giving weight to ESG factors in their LTI plans has surged from 25 in 2020 to 196 in 2023.
The weighting of ESG-based performance measures within short-term incentive (STI) plans has also been on the rise from 76 in 2020 to reach a peak of 224 in 2022. However, this was followed by a slight decline to 216 last year.
Richard Adeniyi-Jones, Manager for Engagement at EOS at Federated Hermes Limited, said the rise in the use of ESG metrics has been driven by both internal and external factors. “Firstly, I think it’s a drive from companies themselves to prove their ESG credentials or make them quantifiable and therefore easier to point out to internal stakeholders that they are looking at ESG – typically that is climate related, however there are often social elements mixed in with broader ESG topics,” he said. “I also think that there’s been a constant push from investors on the outside to see these more measurable, quantifiable ESG metrics, so that they themselves can properly assess whether companies are following through on their stated objectives and are incentivizing their workforce to do so.”
Key performance indicators
Carbon emissions and diversity continue to be the most frequently used ESG metrics in the index and also those with the highest weighting.
In 2023, 71 companies in the index disclosed having a KPI relating to carbon, largely in line with 2022 but a marked increase on the 18 that had cited carbon in 2020.
Companies have also been increasingly integrating diversity as a KPI linked to executive compensation schemes. In 2023, 56 companies in the FTSE 350 made specific mention of having a diversity KPI, double the figure recorded in 2022 and a significant increase from just eight in 2020.
Matthew Roberts, associate director, stewardship at Fidelity International, told DMI that the growing use of the KPI reflects a broader commitment to fostering diversity within the entire workforce. “These factors collectively underscore the growing recognition of the importance of diversity in today’s business landscape."
The move also reflects initiatives in the U.K. in recent years such as the Parker Review – launched in 2015 to consult on the ethnic diversity of U.K. boards. According to the group's most recent report published earlier this year, 12.5% of senior executives are from ethnic minorities in the FTSE 350.
Other measures include the Financial Conduct Authority’s targets for board diversity which came into effect in 2022 and stipulate that at least 40% of board members are women, at least one senior board position is held by a woman, and at least one board member is from a non-white minority ethnic background.
Rollbacks
In other markets such as the U.S. where ESG has increasingly become a political flashpoint, the inclusion of such metrics in executive compensation packages has faced challenges.
In the most recent proxy season, self-described “anti-woke” activist Strive Asset Management pressed 12 different U.S.-based companies – including Advanced Micro Devices, Motorola and Deere & Company - to cut diversity, equity and inclusion (DEI) metrics from their executive bonus plans.
“It’s not surprising to see corporations struggle when their executives are incentivized in ways that don’t improve and often impair financial performance,” Strive CEO Matt Cole had argued. “Several bold corporations have improved how they incentivize their executives this year, by moving away from DEI and ESG measures. I expect more corporations to follow in their footsteps.”
