The resource sector has been experiencing a significant shift in recent years driven by the energy transition and the focus on decarbonization. With this development a greater emphasis on environmental, social, and governance (ESG) factors has emerged as a growing priority for investors, key stakeholders and regulators alike, transforming the way businesses in this sector operate and make strategic decisions. While it is a positive initiative, it can pose a challenge for resource companies to navigate the complexities of implementing an effective ESG strategy.
Shifting Incentives from Short-term Targets to Long-term Sustainability
A critical strategy for implementing ESG targets in the resource sector is linking incentives to executive compensation. This can be achieved by including ESG metrics as part of the executive’s performance-based compensation, such as bonuses or equity awards. By doing so, it incentivizes sustainable practices and demonstrates a commitment to long-term sustainability.
Five Steps to Implementing a ESG Strategy to Executive Compensation
To implement an ESG strategy for executive compensation, resource sector companies can take these five steps:
- Identify Relevant ESG Metrics: The first step is to identify the ESG metrics that are most relevant to the company’s operations and stakeholders. This could include environmental metrics such as carbon emissions reduction and water usage, social metrics such as labor practices and community engagement, and governance metrics such as board diversity and executive compensation.
- Set Clear Targets: Once the relevant ESG metrics have been identified, companies should set clear targets for these metrics. These targets should be specific, measurable, achievable, relevant, and time-bound (SMART).
- Tie ESG Metrics to Executive Compensation: The next step is to tie the ESG metrics to executive compensation. This could include incorporating ESG metrics into annual bonuses or long-term incentives such as stock options.
- Ensure Transparency: To build trust with stakeholders, it is important to ensure transparency in the ESG strategy for executive compensation. Companies should communicate the ESG metrics and targets to stakeholders and provide regular updates on progress towards these targets.
- Monitor and Adjust: Finally, companies should monitor and adjust their ESG strategy for executive compensation as needed. This could include adjusting targets based on changing business conditions or stakeholder demands.
By following the steps outlined above, resource sector companies can set themselves up for success in the transition to a sustainable future.