Should Firms Tie Executive Compensation to ESG Targets?

As investor and regulatory interest in ESG grows, more firms tie executive compensation to ESG targets, with adoption rising from 1% in 2011 to 38% in 2021. Heidelberg Materials exemplifies this by incorporating CO2 emissions into bonus calculations. While ESG incentives can align executives with long-term shareholder value and signal commitment to stakeholders, challenges include measurement difficulties, potential overemphasis on select ESG metrics, and risks of inflated executive pay without meaningful ESG progress.