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Lurse Survey: Sustainability is a Managemgement Mater

Lurse Survey: Sustainability is a Managemgement Mater

  • Companies manage ESG measures primarily at management level
  • Implementation takes place through clear guidelines – and through the compensation systems

Climate and environmental protection require it, legislators and investors want it, and economic success rewards it: sustainable management. The issues of environmental, social and responsible corporate governance – ESG for Environmental, Social, Corporate Governance – continue to gain in importance. The current Lurse survey “Sustainability (ESG) in Compensation” now provides information on the importance of ESG in the 28 DAX and MDAX companies surveyed and the instruments they use to achieve their goals.

The survey focused on three aspects in particular: What strategic relevance do sustainability aspects have in the respective companies? How are they anchored in corporate management? And above all – how are they reflected in the compensation systems?

Companies show sense of responsibility

“Sustainability is the big issue of our time,” says Maximilian Evers, partner at Lurse. “It’s not just national and international regulations, such as the European Sustainability Reporting Standards (ESRS), that demand more commitment to climate and environmental protection, social justice and good corporate governance. Institutional investors, proxy advisors and rating agencies are also increasingly making this commitment the basis of their investment decisions. What’s more, numerous studies show that companies that adhere to ESG guidelines and standards are demonstrably more successful than comparable companies that do not.”

The results show that large German companies are very aware of their role model function. By far the most important motive for addressing the issue of sustainability cited by the majority of respondents was the desire to take responsibility for the environment and society. Legislative requirements and the avoidance of risks for the environment, employees and investments were the main reasons for about half of the respondents. For about a third, the expectations of investors and those of their customers and business partners played a role.

When asked about the general importance of ESG issues, 27 of the 28 companies gave it a high or very high priority. Without exception, all recognize the relevance of sustainability reporting and consider it important (21%) to very important (79%). All three dimensions of ESG are given approximately equal importance. Within the environmental aspect (E), the fight against climate change is in the foreground, while working conditions and equality or diversity in the social area (S) are of great importance. In the area of corporate governance (G), responsible business practices and risk management play a prominent role.

Management task ESG

Lurse also asked how the respective sustainability goals are anchored in corporate management. An overwhelming majority of the companies stated that ESG was firmly anchored in their corporate strategy. “It is evident that ESG issues are largely regarded as a “management matter,” says Maximilian Evers. Nearly 9 out of 10 companies responded that their commitments to sustainable business practices are set out in the objectives of their management or board of directors. More than two-thirds also set firm sustainability targets for their downstream management.

Almost all respondents rely on concrete targets and key performance indicators (KPIs) to enforce their sustainability criteria. Around 4 out of 5 companies also have clear internal guidelines and instructions for action, for example on production standards or purchasing guidelines. Almost two-thirds have also committed themselves to complying with internationally recognized standards, such as those specified by ISO or the United Nations. In addition, half of the companies surveyed have their sustainability practices regularly checked by audits or certifications.

Sustainability aspects in the compensation system

Companies that integrate ESG principles into their corporate management must ultimately ensure that these principles are also reflected in the compensation systems. For this reason, Lurse also asked whether and how compliance with sustainability criteria affects the (variable) compensation of individual employee groups.

This is currently the case above all in management. Without exception, all respondents stated that the remuneration of board members depends, among other things, on their performance in terms of ESG. More than a third of the companies also incorporate ESG criteria into the compensation of other employee groups or plan to do so in the future. This shows that the consideration of sustainability aspects in compensation tends to decrease at lower management levels.

ESG objectives are anchored in 8 out of 10 cases through their consideration in long-term variable remuneration (LTI), followed by the annual bonus (55%). The weighting of ESG targets within the respective bonus component varies on average from 15% at the lower to over 30% at the top management levels. A malus rule for (retroactive) reduction in case of violation of sustainability criteria was reported by only two companies.

ESG targets are defined at all companies in the form of clear, quantitative KPIs and key performance indicators with corresponding target achievement levels. Just under half also formulate qualitative targets such as the fulfillment of certain standards. One third also base their target setting on the EU sustainability reporting standards (ESRS). Analogous to the prioritization in the corporate strategy, the aspects of climate change (esp. CO2 emissions, reduction, neutrality), working conditions and diversity (quotas), as well as responsible business practices, also dominate in the managers’ goals.

Two-thirds of the companies surveyed estimate that the targets set are either met (52%) or exceeded (24%). In this context, target achievement for the sustainability criteria behaves comparably (29%) or even better (33%) compared to the other (financial) targets.

“When it comes to linking ESG targets to compensation, companies face three main challenges,” explains Maximilian Evers. “They need to formulate concrete targets and set assessment criteria to measure their compliance. And they need to find the right measure of the extent to which meeting or missing sustainability targets affects compensation.” All in all, German companies are well on their way toward sustainability.