INCENTIVES AND SUSTAINABILITY: MYTHS AND REALITIES ABOUT ESG METRICS IN CEOS’ COMPENSATION IN THE MAIN EU ECONOMIES

federico fornasari (Bank of Italy)
nicolò galasso (university of Venice Ca' Foscari)

Abstract

Executives remuneration, as one of the main corporate governance levers, could not go unscathed from the ESG debate. While detractors have decried the risks of ESG-linked variable remuneration, others have argued in favour of this policy. Our paper takes a comparative look to the diffusion of ESG-linked remuneration in the main EU economies (France, Germany, Italy and Spain) between 2018 and 2022 and delves in a novel and rich empirical dataset about remuneration practices and economic performance. We do not find any negative economic result for companies introducing ESG linked remuneration, but also we do not find culprits that this governance mechanism is effective in ensuring the rebalancing of power that the supporters of sustainability in corporate governance hope for. Whereas we discard scaremongering about the effect of ESG on companies’ financial performance, we also cast a sober light about its prospect for meaningfully enhancing sustainability. To achieve meaningful results beyond what it is also value enhancing or neutral, the corporate governance toolbox should be expanded and go beyond mere incentives.

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