The importance of ESG in everyday business life has increased rapidly in recent years. Sustainability is now an integral part of successful corporate strategies and is demanded by broad stakeholder groups such as regulators, employees, investors, and civil society. In recent years, sustainability criteria have increasingly been included in the performance-related management objectives of executive boards. The Austrian Corporate Governance Code supports the inclusion of sustainable performance criteria for management, which also include non-financial key performance indicators. By incorporating concrete and measurable ESG objectives into short- and long-term incentive programs, the supervisory board, in its function as a strategic control body, can incentivize management to pursue sustainable business practices.

Robust corporate governance and a central role for boards are critical for getting on the front foot with ESG and achieving the cultural and mindset change needed to drive a sustainability transformation.

Julie Linn Teigland, EY EMEIA Area Managing Partner

International comparison of sustainable compensation structures

A global study analyzed the use of sustainable performance criteria, ESG metrics, in executive compensation at over 10.000 companies. A clear trend is evident: Since 2018, the frequency of ESG targets in compensation has more than tripled. The comparison over several years is even more impressive: A decade ago, the proportion of companies examined with sustainability targets in their compensation systems was 1 percent; last year, it rose to a record high of 38 percent. This trend is particularly evident at Companies in industries with high social responsibility (e.g. in the energy sector) the proportion of sustainable remuneration targets is significantly higher.

A look at Austria shows that in the ATX Prime six out of ten Company ESG goals into executive board compensation. Sustainable compensation incentives are now available at all major ÖBAG subsidiaries. While in Austria the focus is primarily on the short-term component, in Germany, sustainability is also given high priority in the long-term compensation component.

Covid-19 as a boost for sustainable development in the last two years

An exciting development was shown by a Survey by Ernst & Young with a focus on Europe. The pandemic has provided a real boost for sustainable business. 84 percent of all senior executives surveyed feel that stakeholder expectations of companies for growth in line with social and ecological sustainability have increased.

This development is also due to pressure from investors. Today, according to a PwC survey 68 percent of investors use ESG performance measurement and targets for executive compensation. The top three ESG topics for investors are reducing Scope 1 and 2 emissions, improving employee health and safety, and equality, diversity, and inclusion.

As a state holding company, sustainable business is part of the DNA

Investors strive to promote the sustainable development of companies. ESG is particularly essential for ÖBAG, as a public investor. As stipulated by ÖBAG's legal framework, the state holding company is obligated, in the interest of all Austrian taxpayers, to pursue sustainable and long-term value creation in its investment management. Through their work on supervisory boards and remuneration committees, the nominated representatives of the state holding company can exert a positive influence on the companies' overall social responsibility.

In 2021, ESG targets were further established as criteria in executive board compensation at listed portfolio companies. ESG metrics are now key criteria in the variable compensation of executive board members at all listed ÖBAG portfolio companies and larger non-listed companies.

Comprehensible and measurable targets are of particular importance in order to quantify the companies' sustainability performance. The achievements and challenges are also increasingly being discussed in specially established committees as part of the supervisory board's work. The global comparison shows that ÖBAG and its companies are already very well positioned in terms of ESG executive compensation compared to international corporations. Important topics for a climate-neutral, circular, and diverse society of the future are addressed in the compensation targets.

In the future, it will be important to continue to promote sustainable corporate goals, which can provide social and ecological added value for Austria through the commitment of the individual portfolio companies.

Stefan Setzger works as an investment manager at ÖBAG. He also analyzes the ESG performance of the ÖBAG portfolio. Previously, he worked in management consulting, focusing on strategy consulting. Stays abroad in Ireland, Chile, and China shaped his understanding of global economic interrelationships.