Strategies for incorporating Environmental, Social, and Governance (ESG) factors into corporate operations.
In the business world, Environmental, Social, and Governance (ESG) considerations are no longer just nice-to-haves, but essential elements of a company's operations. Companies across the globe, including Chinese firms, are increasingly integrating ESG into their strategies.
Ant Group, for instance, has announced that it will include risk management and ESG sustainability in its annual assessment, linking it directly to executive compensation. This move is part of a growing trend where ESG is being linked to performance appraisals and executive compensation in some companies.
Similarly, Lego has announced that from 2024, carbon emissions and a portion of Scope 3 will be included in the bonus assessment mechanism for all employees, including executives. This decision underscores the commercial benefits of ESG, making its value more evident.
However, for companies new to ESG, finding the right approach can be challenging. Linking ESG performance with business executives' compensation is a practical methodology that is gaining traction. By doing so, companies can incentivise their executives to prioritise ESG concerns, making it a crucial step in advancing ESG implementation.
Incorporating ESG into Objectives and Key Results (OKRs) is another crucial step. OKRs serve as a powerful tool for companies to manage ESG, as they provide clear, measurable targets that can be tracked over time. Expecting perfect ESG implementation in one step may be too demanding, but starting with OKRs can serve as a powerful first step.
The establishment of an ESG performance assessment system is also being suggested as an important criterion for evaluating the effectiveness of ESG committees. Experts and scholars believe that ESG must transition from being the responsibility of a single department to a company-wide priority.
However, resistance from business executives in incorporating ESG indicators is a common challenge faced by ESG teams. Companies that are doing ESG might find it more effective to first complete its implementation, then strive for perfection.
The trend of linking ESG performance with executive compensation is not limited to Lego and Ant Group. Many companies, both large and small, are following suit. For instance, Frequentis, a company that recently strengthened its ESG commitment by achieving ISO 50001 certification for energy management, has demonstrated its commitment to sustainability. While specific details about the integration of ESG metrics into executive target and performance evaluations are not available, the company's actions show a clear commitment to ESG.
Meanwhile, Chinese companies have been actively strengthening their ESG management, with a significant increase in the number of newly established ESG committees. However, many companies remain the silent majority, not systematically advancing ESG work, with ESG still seen as the responsibility of a single team.
As the commercial benefits of ESG become more apparent, it is expected that more companies will follow in the footsteps of Lego and Ant Group, linking ESG performance with executive compensation and making ESG a company-wide priority.
This article was written by Xue Xiaowan for 36Kr.
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