Almost 75% of CFOs say their job is impacted by environmental, social and governance (ESG) performance expectations but only 6% of them have their pay tied to how well they do against those goals, a Deloitte survey shows.
The finding suggests a disconnect between the importance companies say they place on ESG performance and the incentives they give their finance leaders to meet their goals.
“While there is a strong desire among companies of all types and sizes across industries to prioritize and integrate purpose, implementation remains a challenge,” Deloitte says in its survey report.
As Deloitte defines it, CFOs have three roles to play when it comes to ESG: tracking progress toward regulatory and investor expectations, demonstrating ROI of purpose and embedding purpose in investment criteria.
Given the still-evolving picture for how to track performance against ESG goals, it might not be surprising some companies are falling short of investors’ expectations.
Half of investors in an EY survey late last year say companies’ ESG reporting lacks substance. Finance leaders tend to put a better gloss on it, with only roughly a third of CFOs agreeing their company’s ESG reporting lacks substance.
That's a gap, EY says, "between how useful companies believe their ESG reporting to be and the views of investors who use it in their decision-making.”
By putting out reports that investors view as lacking substance, Deloitte says, companies are risking their reputations. “Business leaders are facing risks associated with … perceived purpose-washing,” it says.
To be sure, CFOs are finding it difficult assigning values to non-financial goals given the absence of agreed-upon standards on how to do it.
As Accenture says in a report it released last month, many companies are “managing blind” on ESG reporting.
Fewer than half of large companies have identified how to gauge the sustainability of their operations despite rising pressure from investors and public officials, it says.
"Deficiencies in the ability of companies to target, manage, measure and report sustainability performance still hamper the ability of businesses to effectively deliver on their sustainability commitments,” Accenture says.
One way Chris Kuehn, CFO of industrial manufacturer Trane Technologies, is measuring his company’s performance is by how well it's doing against his company’s “Gigaton challenge,” he says in the Deloitte report.
The Gigaton challenge is based on a goal of reducing global emissions 2% by 2030 by increasing the efficiency of HVAC systems in buildings, among other things.
“We’d love to find 49 other like-minded companies to sign up for their own Gigaton challenge,” Kuehn says.
Deloitte presents Trane is an example of a company that has tried to tie executive compensation to ESG performance.
“Our annual incentive plan," Kuehn says, "has specific ESG goals to tie compensation to ESG-related performance, and every employee with a performance plan is asked to set at least one goal tied to our 2030 sustainability commitments.”
Trane’s sustainability goals are broken down by business unit and corporate function. “I make sure my team can aggregate the information to show the progress we’re making year over year,” he says.
Of everyone in the C-suite, according to the Deloitte findings, CFOs, at 6%, face the weakest tie between compensation and ESG performance. By contrast, 45% of CEOs said their performance has an ESG link and 33% of all executives said they do.
Deloitte’s findings are based on results from 212 executives in public and private companies, split roughly between those above and below $1 billion in annual revenue.