An increasing number of companies are paying bonuses to executives in the pursuit of sustainability. Driven by an ever-growing focus on global issues, more than three-quarters of large,

publicly traded companies in Europe and North America now use environmental, social and corporate governance (ESG) metrics when determining executive bonuses. In addition, nearly two-thirds

of companies in Europe and the United Kingdom now include environmental criteria as part of their executive incentive schemes. Typically, annual cash bonuses represent about 24 per cent of a

typical CEO’s pay. Since bonus payments depend on the achievement of specific performance goals, their influence on executives’ actions tends to be more immediate. While such incentives can

By 2020, more than 43 per cent of executives from the largest 500 publicly traded U.S. firms had ESG incentives. Since the use of ESG incentives is relatively new, we suspected they might be

susceptible to abuse and decided to investigate. Our recent study examines how ESG incentives impact yearly bonuses for top executives. Since these large companies are required to disclose

information on how they pay their top executives, we used novel artificial intelligence to examine these companies’ documents. In our analysis, we took into account how much money we

expected executives to make, how much power they had over their firm’s board of directors, whether they used ESG incentives or not and whether a variety of corporate governance mechanisms

(like sustainability committees) were in place. THE GOOD NEWS AND THE BAD NEWS Our study found that overall, executives do not appear to be leveraging their power to get higher compensation

through ESG incentives. That’s the good news. The bad news, however, is that not all executives are wielding their power for good. Some executives seem to use their power to obtain higher

bonuses from ESG incentives. This seems to happen particularly in environmentally sensitive industries (mining or oil and gas, for example) or in firms that have other corporate governance

mechanisms in place, like sustainability committees. It’s possible that tighter oversight is needed in certain industries or even that some corporate governance mechanisms may be more for

show than for governance. For instance, board members should ensure they have the requisite knowledge to engage in meaningful conversations about the use of ESG incentives in compensation

plans. They may also need to put additional checks and balances in place to better monitor, control and advise management on the use of these incentives, especially with respect to the

selection of ESG performance metrics. WHY DOES THIS MATTER? Key stakeholders like the Canadian Coalition for Good Governance, standard setters like the International Sustainability Standards

Board and rating agencies such as MSCI advise organizations to include ESG goals in executives’ compensation plans. The objective, presumably, is twofold: to measure what matters and

provide executives with incentives to move their organizations toward sustainability. However, the connection between ESG incentives and sustainability is not so clear-cut. We still need to

learn more about the use of ESG incentives to be able to apply them properly. Moreover, firms often equate their ESG focus with sustainability, but the two are not the same. A focus on ESG

is a focus on how environmental, social and governance factors affect the financial performance of the firm while a focus on sustainability is a focus on how the firm affects society and the

environment. Think of it as the difference between a selfie and a landscape photo — one looks inward (ESG) and the other outward (sustainability). There is limited evidence that awarding

bonuses based on ESG criteria automatically translates into improved sustainability for a company. While there is some evidence they might, it’s still too early for a definite answer. ESG

factors focus on risks and opportunities that affect _financial_ performance, not necessarily those that are connected to planetary sustainability. In fact, there is no work to date that we

are aware of that connects a firm’s ESG performance to planetary sustainability at all. While ESG incentives may help a firm mitigate the risk of investors’ or regulators’ intervention, they

don’t necessarily translate into sustainability performance. We cannot reiterate this enough: a focus on ESG is a focus on risk and opportunity management, not sustainability. Our research

is a reminder, to boards of directors, executives, regulators and standard-setters, that one-size-fits-all is rarely appropriate and without looking closely at what is happening, these

incentives can be abused.