Finsif tukee vuosittain vastuullisen sijoittamisen tutkimusta stipendein
Finsif jakaa stipendejä vastuullisesta sijoittamisesta kiinnostuneille opiskelijoille ja tutkijoille. Stipendien jaon tarkoituksena on edistää vastuullisen sijoittamisen tutkimustyötä. Stipendejä jaetaan vuosittain enintään 8000 euron summalla. Vuoden 2025 stipendihaku alkaa keväällä. Lisätietoa
The increasing share of executive compensation tied to ESG (Environmental, Social, and Governance) objectives has drawn criticism from institutional investors. This shift contrasts with the traditional framework of Friedman (1970), which emphasizes maximizing economic profits and shareholder welfare. Instead, executive pay is increasingly linked to ESG objectives, reflecting societal trends and stakeholder demands for corporate accountability in societal and environmental responsibilities.
Over the past decade, the share of ESG-linked metrics in executive compensation contracts has more than doubled, while metrics tied to profitability have declined. Critics argue this may divert executives’ focus from operational performance to ”intangible” ESG goals and could be used to justify performance-insensitive pay.
A Novel Approach to Evaluating ESG-Linked Compensation
In our master’s thesis, we present new perspectives on the impacts of ESG-linked compensation on firm performance. Unlike prior studies that use binary variables to indicate ESG engagement, we introduce a granular variable to measure year-to-year changes in the relative share of compensation tied to ESG objectives. This approach allows us to assess how increasing emphasis on ESG impacts firm ESG performance, financial outcomes, and investor sentiment.
ESG Performance Improves Without Compromising Financial Growth
Our findings confirm a significant positive relationship between increases in ESG-linked metrics and improvements in firm ESG performance. While earlier studies have explored ESG-linked pay adoption, we uniquely examine how incremental changes in compensation weights affect firm ESG ratings.
Contrary to concerns about “fluffy” ESG targets, our analysis finds no significant relationship between increases in ESG-linked metrics and changes in relative sales growth or gross profit margins. This suggests that ESG incentives do not harm financial stability.
Positive Investor and Stakeholder Response
We also identify a significant positive impact on short-term stock returns for institutionally owned firms following announcements of ESG-focused changes to executive pay. Firms prioritizing emissions reductions through compensation achieve higher annual returns, indicating that environmental responsibility may be more valued than other ESG metrics.
ESG Compensation: A Lasting Trend with Evolving Guidelines
ESG-linked objectives have become a staple of executive compensation, driven by external pressures from stakeholders and intrinsic business motivations. Adopting ESG commitments enhances a firm’s ability to attract talent and appeal to ESG-conscious customers and investors.
However, challenges persist, particularly the perceived intangibility of ESG targets and concerns about greenwashing. Boards must establish clear, measurable metrics and communicate progress transparently to build trust and credibility.
As guidelines evolve, ESG-linked compensation is likely to mature into a standard practice, supported by regulatory developments to enhance its effectiveness and credibility.
Milja Lempinen
M.Sc. in Economics and Business Administration, Finance, Aalto University 2024
Janne Liu
M.Sc. in Economics and Business Administration, Finance, Aalto University 2024
The study can be found here.
