As people’s awareness of social and environmental issues increases, employers are gradually moving to place greater emphasis on ESG (Environmental, Social and Governance) standards. These are gaining in importance for employers, whether viewed from an external or an internal perspective. On the one hand, investors and customers are directing their choices towards the most ESG-compliant service providers. With specific reference to compensation and benefits, ESG may be involved both in setting a business’s targets and in granting sustainable benefits to employees; an employer that is ESG-oriented also has a competitive advantage when it comes to attracting and retaining talent.
Sustainability seems to have a truly positive impact on shareholder value. This means that employers should not fear adopting more ‘sustainable targets’, in addition to more traditional key performance indicators (KPIs). Strong ESG performance may also be a key contributor to a business’s performance. It is therefore advisable for employers to set measurable ESG targets for both their CEOs and employees, and to include ESG metrics in pay packages (bonuses and long-term incentive plans).
Employers should be aware that this could be very challenging. Focusing on reducing their own carbon footprint could have smaller effect than cutting off business with companies that emit carbon, and there’s a risk of distorting incentives. It is recommended to draw a distinction between internal and external ESG targets. Internal targets are used by companies to benchmark themselves, such as on diversity and inclusion initiatives, investments in reducing emissions or green technology. External targets, on the other hand, are based on stakeholder impact. This could include, for example, the total emissions produced, the health of sealife, or strategic or technological innovation. For more targets, it is advisable to refer to the 17 Sustainable Development Goals (SDGs) available on the website of the United Nations. From a general standpoint, internal targets, such as health and safety goals and gender pay targets, are more effective when they must be reached over a single year. External targets, such as environmental goals, are much more suitable for long-term incentive (LTI) plans because of their longer-term character.
BP (former British Petroleum) uses ESG measures in both its annual bonus policy and its LTI plan. The LTI plan now has strategic goals around renewables, the energy transition, and car electrification. With respect to Italian companies, we can mention Tim, which currently has a bonus policy with short-term internal targets including measures of customer satisfaction and the engagement of young employees, and an LTI plan focusing on overall energy consumption.
In addition to bonus plans, ESG is now influencing benefits packages. Employers should not miss the chance to re-design their benefits packages, taking into account the increasing importance of sustainability. When it comes to pension schemes and investments in retirement plans, employees are now looking for socially conscious and environmentally friendly investments that align with their values.
Among the ESG goals that employees care particularly about is the imperative to reduce carbon emissions. Employers could respond to this sentiment by granting individually tailored benefits packages for employees who choose public transport, carpooling, or cycling for their commute, or who choose to walk to work.
In addition to the environmental advantages, this approach may also save employers money. Adopting an eco-friendly approach could allow a carbon-intensive fuel allowance to be replaced by a greener and cheaper mode of transport (e.g. e-bikes or e-scooters). Another example would be the replacement of traditional meal vouchers with locally-sourced food discounts or more environmentally sustainable meal vouchers. The ways to promote ESG through employee benefits are many and all of them can play an important role in attracting and retaining younger workers’ talents.
The ESG-oriented use of compensation tools such as annual bonuses and LTI plans, as well as the design of benefits packages characterised by social relevance and environmental awareness, can play a very important role for employers. ESG should not only be seen as a set of sustainability obligations to be complied with, but also as a unique opportunity. Not only does it provide an opportunity to improve both the financial performance and public reputation of the company, it can also help in attracting, retaining and engaging employees.
Authors: Emanuela Nespoli, Matteo Costa, Camilla De Simone, Riccardo Ferri, Francesco Foria (Toffoletto De Luca Tamajo, Italy)
Find out how ESG issues are shaping policy and practice in other areas of employment law