Integrating environmental, social, and governance (ESG) considerations into business operations has been one of the most discussed and challenging issues lately. The main problem? Implementation.
A solution gaining traction is linking ESG to performance appraisals and executive compensation. Essentially, ESG is getting incorporated into the objectives and key results (OKRs) set for company executives. Several large companies are already doing this. For example, Lego and Ant Group recently announced they would link ESG indicators to executive compensation.
In May, Lego announced that, from 2024 onwards, Scope 1 and Scope 2 carbon emissions, along with a small portion of Scope 3 (business travel), would be included in the bonus assessment mechanism for all employees, including company executives. The company added that the scope of Scope 3 assessments may be expanded in the future. Ant Group also stated in its 2023 sustainability report that it would include risk management and ESG sustainability in the company’s annual assessment and link it to executive compensation.
For effective implementation, ESG must transition from being the responsibility of a single department to a company-wide priority. Incorporating ESG into OKRs is a crucial step in advancing its implementation. Transitioning ESG from a floating strategy to individual-focused OKRs is likely to trigger significant change within companies, introducing a new set of challenges, doubts, pains, and opportunities.
What’s the right way to manage ESG as a business?
Imagine this: CEOs are holding lengthy meetings, spending over five hours individually reviewing each business executive’s ESG OKRs. This scenario sounds inefficient, but it happens in real life within companies. While executives are well-versed in business, their expression of ESG-related OKRs often remains immature. Some only talk about visions and values, while others directly copy business indicators. This reflects that the executives are still in the early stages of understanding and integrating ESG into business operations and require a period of adjustment.
This is understandable. For both companies and individual executives, there aren’t many mature examples to follow for implementing ESG. Large companies generally use methods like OKRs and compensation assessments because they are relatively mature business management practices, applying them to ESG management to create more potential for integration.
In recent months, ESG policies and standards have been frequently introduced by Chinese companies, and they have been actively strengthening their ESG management under this wave of certainty. One noticeable trend is the significant increase in the number of newly established ESG committees. According to Shanghai Securities News, 36 A-share companies established new ESG committees or converted their board’s strategic committees to ESG committees in the first quarter of 2024.
This has brought changes to overarching organizational structures, but the outside world is more concerned about whether these moves are merely superficial or genuinely capable of promoting ESG implementation. 36Kr noted that experts and scholars have suggested the establishment of an ESG performance assessment system as an important criterion for evaluating the effectiveness of ESG committees.
For companies, linking ESG indicators to executive compensation is just the first step in establishing this new performance assessment system.
Don’t let perfection become ESG’s enemy
Transformations inevitably lead to controversy and even resistance, especially when it involves personal finances. 36Kr has learned that some companies’ ESG teams experience tough conversations when trying to convince business executives to accept the incorporation of ESG indicators: the business side questions why carbon reduction performance is their responsibility and what ESG has to do with business.
This situation is changing. The ESG trend is becoming more certain, with discussions about the integration of ESG and business increasing across industries, and the commercial benefits of ESG are also gradually becoming apparent. These factors make the value of ESG more evident across various dimensions and highlight its relevance to operations.
In practice, business units are more cooperative with ESG work than before: they actively provide data, show greater concern for the company’s ESG report preparation progress, and hope their work can be included in the report.
From updating governance structures and setting ESG indicators combined with business to actual changes, some companies are gradually finding a path for ESG implementation. However, many companies remain the silent majority, not systematically advancing ESG work, with ESG still seen as the responsibility of a single team rather than being genuinely integrated with business departments and daily operations.
Linking ESG performance with business executives’ compensation in various companies provides a practical methodology for many companies that want to do ESG but struggle to find the right approach.
When idealistic ESG becomes an OKR-based performance appraisal, some might find this method crude. But in reality, companies cannot achieve perfect ESG implementation in one step. Expecting perfection from the start may be too demanding. Starting with OKRs may not be perfect, but it can serve as a powerful tool for companies to manage ESG and promote its true implementation.
For companies doing ESG, perhaps it’s about first completing it, then perfecting it.
KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Xue Xiaowan for 36Kr.