New research from Peel Hunt and SIFA Strategy shows that ESG has now become a key component in boardrooms of UK mid- and small-cap companies.

The research shows that 86% of UK mid- and small-cap companies now link some form of executive management remuneration to ESG performance, up from 25% last year. Also, over half of companies embedding ESG within their strategy; but only 13% consider ESG fully embedded within their business operations.

According to a survey of UK mid- and small-cap company executives included in the research, four out of five see ESG as positively aligned with shareholder returns, either as a factor of value creation or in driving higher resilience. The large majority of executives believe each of the three ESG issues will have an impact on the valuation and performance of their company over the next decade. 79% reference environmental factors driven in part by regulatory requirements such as the Task Force on Climate-related Financial Disclosures (TCFD) and the push for Net Zero; while 83% now consider social issues to be a core driver of value, and 77% rate governance.

There has been a significant increase in the number of companies linking ESG in some way to executive pay: 86% this year compared to only 25% in 2021. Most companies are working towards or have put in place a link to short-term bonuses or LTIPs, or both, with up to 20-30% related to ESG. The most frequently referenced ESG metrics being used include carbon emissions, NPS scores, health and safety measures, and people-related metrics related to Diversity, Equity, and Inclusion (DEI) or attrition rates. This is expected to evolve to include more diverse metrics as ESG continues to be embedded within companies and becomes more closely aligned with financial performance.

Sunil Dhall, Chief Financial and Operating Officer of Peel Hunt commented:“Despit e concerns around macroeconomic issues, ESG is still an important consideration for Boards. The findings of the research show that the overwhelming majority of mid- and small-cap UK company Boards are more concerned about ESG issues than ever. Moreover, Boards are taking action to ensure ESG is at the heart of strategy, with increased investment planned for next year and a focus on ESG-linked remuneration for executives. We also see no evidence that the capital markets are placing any less importance on ESG in their capital allocation decisions. We expect ESG to continue to evolve into a central Board and management practice in the years ahead, for both public and private companies.”