Article: Why are APAC companies embracing ESG-linked executive incentives?

Compensation & Benefits

Why are APAC companies embracing ESG-linked executive incentives?

Investors' priorities are changing and there is a demand for executive accountability towards ESG commitments.
Why are APAC companies embracing ESG-linked executive incentives?

Public companies in Asia-Pacific (APAC) are catching up with their global counterparts in incorporating environmental, social and governance (ESG) measures in their executive compensation programmes, according to a new study by WTW, a global advisory, broking and solutions company.

Based on the companies that disclose information on the use of incentive metrics, European companies continue to lead the pack with 91 per cent using at least one ESG metric in their incentive plans, exceeding the global average of 75 per cent. 

This was followed by US companies at 69 per cent, with APAC closely behind at 63 per cent. 

The WTW study also shows that while most European and North American companies disclose information about metrics used in incentive plans, only 62 per cent of APAC companies did so.

The prevalence of ESG metrics in short-term incentive plans is significantly higher than long-term incentive plans across all regions. More than 50 per cent of companies in APAC incorporate ESG metrics in their short-term plans, behind Europe (85 per cent) and US (67 per cent) companies. 

For long-term incentive plans, the number of APAC companies (28 per cent) that incorporate ESG metrics remains behind Europe (46 per cent).

The most prevalent measures that APAC companies use in incentives plans are social metrics (47 per cent), which include sub-categories such as people and HR, diversity and inclusion, as well as health and safety. 

Three in 10 companies (31 per cent) incorporate governance measures in areas such as risk management and corporate social responsibility. 

Only 28 per cent of companies incorporate environmental measures, including climate change, carbon emissions reduction, and responsible use of natural resources.

Of the top 300 leading companies in APAC, 188 companies disclosed the metrics they use in incentive plans. Among these 188 companies that were included in the study were public companies in Australia, China, Hong Kong, India, Japan, Malaysia and Singapore.

In APAC, Australia, Japan, and Singapore have emerged as market leaders in the disclosure of metrics used and the integration of ESG measures into executive incentives. 

Among those that disclose, all companies in Australia (100 per cent) incorporate at least one ESG measure in their compensation plans, followed by Singapore at 65 per cent and Japan at 62 per cent.

People and HR measures are the most commonly used metrics in the short-term incentive plans, with 89 per cent of companies in Australia, 60 per cent in Singapore and 19 per cent in Japan incorporating them in their executive compensations.

As for long-term incentives, companies in Japan lead in prevalence with the incorporation of at least one ESG metric into the incentive plans (39 per cent), followed by Australia (19 per cent) and Singapore (10 per cent). Environmental and Sustainability measures are the most prominent metrics, used by 22 per cent of companies in Japan, 14 per cent in Australia and 10per cent in Singapore.

“While APAC had a delayed start, we are seeing companies in the region pick up the pace in their ESG commitments, particularly in areas such as climate, human capital and DEI (diversity, equity and inclusion), as well as broader corporate governance measures. This underscores a growing ethos of aligning business strategies with sustainability priorities, and companies serving the best interests of all stakeholders,” said Shai Ganu, Managing Director and Global Practice Leader, Executive Compensation and Board Advisory, WTW.

Xujing Zhu, Asia and Australasia Leader, Executive Compensation and Board Advisory, WTW noted that the APAC region has seen an exponential surge in ESG integration and commitment in recent years, driven by tightening disclosure requirements from regulators. 

“Pressure is clearly mounting for companies to establish an ESG agenda to remain competitive, relevant, and aligned with the priorities of their stakeholders. This makes the disclosure and incorporation of ESG metrics into executive incentive plans ever more important. Not only will it help to respond to the changing priorities of investors and create more accountability for executives towards the company’s ESG commitments, but in the long term, it can also be an effective way to impact business priorities and influence decision-making to take ESG into greater consideration,” Zhu said. 

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Topics: Compensation & Benefits, #ESG, #DEIB

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