ESG Performance Influences Executive Pay at 74% of APAC Companies

Responsible Us Bureau Jan 20, 2025 Add to Reading List

APAC Region: Links of ESG metrics to executive pay and Trends and Challenges
More Asia-Pacific region companies are adding environmental, social, and governance (ESG) metrics to their executive compensation plans, according to a report by global advisory firm WTW. Meanwhile, 75% of the top 50 listed companies in APAC have started including ESG metrics in executive pay - a significant shift in corporate governance in the region.

APAC ESG Metrics Adoption. The report indicated that 193 of the 400 largest companies in APAC use ESG metrics in their executive incentive plans and are mainly from industries such as energy, materials, and financial services, as companies view it as one area where there should be some executive compensation with an alignment on ESG performance, and hence up from last year.

Worldwide, 81% of executive pay plans incorporate ESG metrics. Europe remains the highest at 94%. North America was at 77%, steady compared to the previous year. The APAC rate stands at 74%, below that of Europe but also in growth, hence a true testament to just how fast ESG factors are becoming an intrinsic part of executive compensation policies.

Short-term vs. long-term incentives:
More firms are using ESG metrics in STI plans than LTI plans. 64% of APAC firms report using at least one ESG metric within their STI plans. Only 30% of the companies include ESG metrics within their LTI plans. Similarly, this practice is also practiced at the global level; a greater number of European companies make more frequent usage of long-term environmental goals in their LTI plans than in their APAC counterparts.

Short-term incentives generally align with short-term ESG objectives. These may be anything from short-term steps for reducing carbon footprint to increasing workplace diversity. In contrast, long-term incentives generally are associated with general sustainability goals that have very long horizons, such as net-zero carbon emissions.

Challenges in the APAC Region
The positive adoption trend presents quite a number of challenges regarding the implementation of ESG metrics into executive pay in the APAC region. One of the major issues is the inconsistency of the application of ESG disclosure rules across markets. The level of ESG transparency varies by country, and sometimes it's even harder for one market to be tougher than the others. This presents challenges to investors and other stakeholders trying to evaluate ESG performance across different companies on the same standard.

The expectations of APAC institutional investors are also different with respect to ESG disclosures and executive compensation. Australia, Japan, and Singapore have dramatically improved adoption rates of ESG metrics. However, other countries are lagging not only in embracing ESG metrics but also in transparency.

Role of Social Metrics
The most utilized category among the ESG metrics is social metrics. This category is being applied by 62% of the firms in their plans, according to the analysis carried out on the APAC region. Most commonly relates to employee welfare, community development, and human rights behavior. The D&I metrics are very widely used also. Our report says 59% of the companies in the APAC region are using D&I metrics in executive pay plans.

There is, however, a more promising aspect of executive pay in the region: environmental metrics, particularly those that seek to cut greenhouse gas or carbon dioxide emissions. While compensation for these is tied up with 42% of companies, on the face of it, environmental goals are increasingly part of executive incentives.

Future of ESG Metrics in Executive Pay
The increasing geopolitical changes continue to influence the global business landscape, and therefore, the pace of ESG metrics in executive compensation plans in North America will probably decelerate. Companies in the APAC region will continue driving their ESG initiatives by ensuring that their strategies are aligned with incentives for their executives.

Incorporating ESG metrics in executive compensation is one step forward in the way of positive corporate behaviors and answering questions regarding which companies would be held responsible for their effects on the environment and society. So, the future seems bright for APAC companies that will continue to emphasize sustainability and responsible business practices.
Conclusion
ESG metrics in executive and director compensations have been going up across the entire APAC region, but social metrics lead. Even if this pace may not be equal, it still goes to an increased global adoption towards sustainability and corporate accountability. However, uneven rules pertaining to disclosure and divergent institutional investors' expectations remain significant hurdles for most businesses in this region. The factor of accountability, sustainability, and transformation will be the ones that propel APAC forward as corporate governance changes and companies start including ESG performance in executive compensation.