Rocked by allegations of wrongdoing and spurred on by investors seeking more than simple earnings reports, many companies are turning to the use of ESG metrics. These metrics can supply a more well-rounded picture of company performance. But how do they work, and how are they measured?
Here's an overview of how companies today use ESG metrics in executive compensation. You can also read about what the future bodes for company performance as a whole.
What Are ESG Metrics?
What is ESG? Why do so many people seem to care about it all of a sudden?
It is tricky to define a precise ESG metrics meaning, but basically, ESG focuses on sociopolitical issues. ESG stands for environmental, social, and governance issues. These are very important to consumers and investors, even if they aren't reflected in normal earnings reports.
Companies use ESG metrics to track more obscure components of how a company is run. Basically, ESG metrics' meaning is to look at how well a company handles environmental issues, social issues, or governance issues, both internally and among their communities. If a company pollutes a lot, or treats its employees poorly, or has a sleazy executive, they will have very bad ESG metrics.
Not everyone uses the same metrics or measurements, and not everyone is in favor of adopting the same standards globally. Some companies and agencies focus more on environmental concerns and eco-friendly business practices. Others focus more on diversity and employee health and safety.
A drawback of ESG metrics is the subjectivity of the measurements, as well as the lack of consensus on which metrics should be used. This has made it difficult to have any one standard that will help determine how well a business is doing. Even so, an increasing number of stockholders want companies to commit to ethical practices.
Nevertheless, there are many measurements on ESG metrics for investors to examine. It can be overwhelming, but we have worked hard to provide a range of tools that let you separate the wheat from the chaff. This makes it easy for you to get the ESG data you need for your investment strategies!
How Are Companies Using ESG Metrics in Executive Compensation?
Many companies are starting to tie compensation for executives to the company's ESG performance. The compensation plans vary greatly between businesses. Generally though, the idea is to incentivize improving the company's good practices.
Not all companies are using ESG metrics, but it is an increasing trend. Of the FTSE 100, 45% included ESG metrics for at least some of their compensation. These compensations are often annual bonuses, but many companies also include executives' long-term incentive plan (LTIP).
Which ESG metrics are used to determine compensation can vary a lot by industry. In the pharmaceutical industry, people want to make sure that safe, healthy medical practices are followed. In food industries, companies want to make sure to use fair trade and sustainable ecological practices.
There are plenty of companies out there that aren't following good ESG practices. Even if their investments are tracking well in the short run, that doesn't mean they will continue their growth. Companies will have a harder time getting away with unethical, unsustainable practices as we move deeper into the 21st century.
How Is This Affecting Company Performance?
Very well, actually! Of thousands of academic studies examining ESG scores and economic returns, around 70% of them show a positive correlation. This is great news for companies and investors over the long term!
Companies are increasingly finding that investors want a company that cares about the environment like they do. Additionally, governments are starting to incentivize greener practices and taxing ecologically harmful ones. Companies that get on board with environmental concerns now will find themselves ahead of the curve.
In the same way, nondiscrimination is very important. You've doubtless seen businesses falter as they're plagued by scandals. By treating employees fairly, for example, companies can head off larger issues down the road.
Overall, investors and shareholders are tired of companies not sharing their values. And they want to back up companies that are willing to improve their practices!
Where Will It Go From Here?
Investors are increasing their calls for eco-friendly business practices, ethical hiring and work practices, and the removal of bad actors from executive boards. And the markets are responding.
Some people estimate that investments into ESG practices and companies will reach $1 trillion by 2030. This is a huge increase in just a little over a decade, where ESG investments were in the low billions in 2018.
People care about their pocketbooks and their investments, but they also care about the environment and social issues. They want to invest in companies that will advance these issues. They don't want to contribute to detrimental practices like so many have done before.
As an investor, it would be wise to look at what kind of ESG practices companies are implementing. For example, Microsoft, Nike, and Steel Dynamics are considered some of the best ESG companies to invest in right now. They are quite profitable, while still paying attention to important ethical and social considerations.
Learn More About ESG Metrics and Data!
If you'd like to learn more about ESG data, we'd love to help! Whether you want to know how ESG data affects investments, the use of ESG metrics in executive compensation, more info on the ESG standards, or anything else related to this type of data, we want to engage in meaningful discussions.
Here is a short video explaining how idaciti and our customers structure ESG data with the XBRL-first approach, and machine learning assisted technology.
Please contact us with any questions or concerns you may have. We want to give you the best information and ESG data analysis possible.
