The challenge of running a sustainable enterprise has taken center stage among shareholders. Last year, for example, Russell 3000 companies received 144 shareholder proposals requesting action on social and environmental issues. Meanwhile, in a survey of 89 institutional investors by Callan, 43% of respondents said they incorporate sustainability factors into their investment decisions — up 21 percentage points from 2013.
The dilemma for directors, however, is determining what aspects of sustainability, or ESG performance, should have priority — and should be linked to pay incentives. The UN, for example, has outlined 17 broad Sustainable Development Goals for 2030. Progress is measured with 169 targets. The goals include eliminating poverty, offering affordable and clean energy, achieving gender equality, protecting ecosystems, increasing responsible consumption and production, and much more. Meanwhile, a number of business organizations have created their own sustainability measures, including the Sustainability Accounting Standards Board, Sustainalytics, Bloomberg, and MSCI. And at many companies, sustainability efforts are measured with well over 10 internal metrics.
Compensation committees often start by tying bonuses and long-term incentives to goals related to compliance and risk management. That approach pleases some stakeholders, but it may put the focus on issues far removed from the company’s core mission. For example, measures of regulatory fines gauge only a company’s environmental “hygiene,” which may reduce risk but doesn’t incentivize executives to increase the company’s broader environmental impact.
What’s a better approach? Have bonuses depend largely, or solely, on executives’ success in tapping big strategic opportunities related to sustainability. By pushing the top team to go on the offense strategically, this change brings the work of advancing sustainability from the periphery of the business to its heart.
Though not all businesses today are in a position to implement big strategic initiatives based on sustainable thinking, the opportunities to pursue them are growing fast. According to a survey by the UN and Accenture, 63% of executives believe that sustainability will cause major changes in their businesses in the next five years. And if that shift ends up determining which companies thrive in the future, then it’s likely that incentive goals must apply to bold business opportunities.
Read more at Harvard Business Review