University of Mannheim: “ESG compensation” for executives reduces the carbon footprint of companies

Companies that include environmental, social and governance criteria in their executive compensation systems achieve tangible improvements in their CO2 emissions, as a study by the University of Mannheim shows.

According to Professor Stefan Reichelstein, Director of the Mannheim Institute for Sustainable Energy Studies and Professor of Business Administration at the University of Mannheim, the inclusion of ESG criteria in executive performance indicators (referred to as “ESG remuneration”) also results in companies being subject to external ratings -Agencies get better ESG ratings.

Companies are more likely to introduce ESG rewards for executives in polluting industries and in countries with greater sensitivity to ESG issues, Reichelstein said.

At the corporate level, large companies in particular, which exhibit higher volatility, tend to introduce ESG rewards and it increases when a company has already made public environmental commitments.

“By incorporating ESG metrics for activities associated with externalities into executive compensation systems, owners can credibly convey to the company’s stakeholders that senior management’s attention is drawn to these externalities. In addition to improving the company’s overall image, a company’s commitment to ‘ESG awareness’ can strengthen customer loyalty and make the company’s shares more attractive to institutional investor groups,” says Reichelstein.

While it can be difficult to spot window dressing around ESG rewards where companies are reluctant to walk the talk, these findings suggest that the majority of companies introducing ESG rewards aren’t just window dressing operate.

This research is based on a sample of 4,395 public companies from 21 countries drawn from the ISS Executive Compensation Analytics database.