Financial incentives needed to help drive ESG: Aon

Companies are lagging in providing financial incentives around environmental, social and governance (ESG) measures despite recognising the importance of the issues and associated risks, an Aon report says.

The Asia Pacific Corporate Governance and ESG Survey Results report finds that 58% of companies state that ESG is critical to their long-term success, but only 29% include related goals and key performance indicators for their top executives.

Aon says there is too much risk associated with not acting swiftly to address ESG issues, while regulatory pressures and investor expectations are prompting a shift in company policy and practices, and boards need to take responsibility for active oversight.

Aon says accelerating and expanding ESG efforts requires boards and management to better understand the links with business strategies, and to use metrics and performance measures, as maturity in the area increases.

“Incorporating ESG performance criteria into executive compensation plans means ESG metrics are more likely to align with the company’s overall strategy and compensation plans,” Aon corporate governance and ESG lead, Human Capital Solutions for Asia Pacific Boon Chong Na says.

“It is becoming clear that failing to address and integrate ESG metrics in the future will expose companies to reputational risk, financial impacts and regulatory consequences as they navigate new forms of volatility.”

Compared with privately held companies, listed companies are twice as likely to have clearly defined ESG metrics and to link them to C-suite performance.

Aon Partner and Head of People Solutions for Australia Simon Kennedy says it’s no longer enough to commit to targets that are not tied to either a financial incentive or disincentive.

“Companies can retain their existing measures, no matter how simple, and enhance them as they move forward,” he says.

“Ideally, ESG targets need to be as measurable as financial targets, preferably using audited numbers based on established standards.”

More than 225 companies participated in the survey, conducted late last year, from across Australia, India, Singapore, Japan, Malaysia and China.

Findings included that around 60% of surveyed companies are fielding more investor questions about ESG, and it is important to communicate the strategy in a compelling way to shareholders.

“While improving ESG, companies need to manage both financial and non-financial aspects, as shareholders expect them to do well while also doing the right thing,” the report says.