Linking ESG To Executive Pay And Financing In 2025: Governance Essentials For Boards And Treasurers
- Gasilov Group Editorial Team
- Dec 11, 2025
- 14 min read
Boards and treasurers in 2025 face a tighter connection between ESG outcomes, executive rewards, and the cost of capital than at any point in the last decade. In the United States, more than three quarters of S&P 500 companies now tie at least one element of executive incentive pay to ESG metrics, according to a 2024 study that finds 77 percent prevalence, up from roughly half only four years ago. At the same time, investors and proxy advisors are asking harder questions about whether those goals are ambitious, comparable, and genuinely linked to long term value rather than serving as a cosmetic overlay.
On the financing side, regulators and lenders are moving from voluntary ESG talk to hard rules. The EU Corporate Sustainability Reporting Directive (CSRD) requires large European companies and many non EU groups with EU listings to disclose sustainability risks, impacts, and governance, including how executive remuneration reflects sustainability performance. The International Sustainability Standards Board has brought IFRS S1 and IFRS S2 into effect for reporting periods starting in 2024, setting a global baseline for climate related financial and risk disclosures that investors can plug directly into valuation and lending decisions.
Banks are also changing their credit playbooks. In January 2025, the European Banking Authority issued final Guidelines on the management of ESG risks, instructing EU banks to integrate environmental, social, and governance factors into credit assessment, pricing, and portfolio monitoring through transition plans and scenario analysis. In practice, this means that weak climate or human rights performance can now show up as a higher margin, shorter tenor, or constrained access to capital, even for otherwise solid borrowers.
At the same time, political pushback is reshaping parts of the ESG landscape, particularly in the United States. Farient Advisors’ 2025 review of S&P 500 proxies, reported by Reuters, finds that the share of companies explicitly tying pay to diversity, equity, and inclusion metrics has dropped from 57 percent in 2023 to 22 percent in 2025, under legal and political pressure. That retrenchment contrasts with a continued focus on climate and governance metrics, which are gaining weight in many incentive plans.
For boards in Europe, North America, and Asia Pacific, including those searching for practical guidance on ESG in Australia or ESG consulting USA, the net effect is clear enough. ESG performance is now being priced directly into incentives and financing conditions, yet the design quality of those links varies widely. This is where boards and treasurers need to move from experimentation to disciplined governance.
Why 2025 is a reset moment for ESG linked incentives
The case for linking ESG to executive pay now rests on more than intuition. A 2024 empirical study, “Executive Compensation and ESG Performance,” finds a positive association between stronger ESG scores and higher executive compensation, especially in firms with robust governance structures, suggesting that boards are already rewarding genuine sustainability performance, not just short term earnings. A 2025 article in the journal Sustainability, “The Impact of Linking ESG Metrics to Executive Compensation,” concludes that ESG linked pay can reduce self interested decisions by executives and support investments that might depress near term profit but improve long term resilience.
In our experience, ESG incentive frameworks often fail when boards treat them as a messaging tool rather than an extension of risk management and capital allocation. The critical shift in 2025 is that ESG outcomes are now explicitly connected to financing terms, which means misaligned pay metrics can create conflicting signals to lenders and bond investors.
Two examples illustrate how quickly capital markets are pricing ESG outcomes.
First, Enel in Italy has been a global pioneer in sustainability linked bonds. In 2019 and subsequent years, the utility issued multiple sustainability linked bonds with coupon step ups of 25 basis points if it missed agreed emissions intensity targets. In April 2024, Enel announced that missing its 2023 greenhouse gas intensity target triggered coupon increases on around 10 billion euro of these bonds, adding an estimated 25 to 83 million euro in annual interest costs, as detailed by the Institute for Energy Economics and Financial Analysis in “Takeaways from Enel’s sustainability linked bonds performance targets” and by Bloomberg in “Enel Forced to Raise Coupons on 11 Billion of ESG Bonds”. Here, a missed climate outcome translated directly into a higher cost of debt.
Second, Tesco in the United Kingdom has combined executive accountability with sustainability linked financing. The company issued a 750 million euro sustainability linked bond in 2020 and a 400 million pound bond in 2021, both tied to targets to cut scope 1 and 2 emissions by 60 percent by 2025 and 85 percent by 2030 from a 2015 or 2015–16 baseline, as described in its climate change disclosures and in “Tesco launches sustainability linked bond of £400m”. In parallel, Tesco has extended sustainability linked terms into its supply chain finance program, so suppliers that improve emissions performance can access better working capital terms, according to the Association of Corporate Treasurers and the International Federation of Accountants. The outcome is a consistent economic signal from boardroom to suppliers.
For boards and treasurers, these examples are not templates, but they show where markets are heading. When climate or social performance determines both executive rewards and loan margins, the design of those metrics becomes a strategic question, not an HR footnote. If your board, compensation committee, or treasury team is debating how far to go, a focused diagnostic across executive pay plans, sustainability linked instruments, and underlying data can identify where incentives reinforce or undermine each other. That is a natural point to bring in external advisers to challenge assumptions without turning the exercise into a theoretical debate.
Governance essential 1: Treat ESG pay metrics as priced risk, not public relations
The first governance essential for 2025 is that boards should treat ESG linked executive compensation as a risk and capital management tool. Under CSRD and similar regimes, investors can see whether sustainability targets, risk registers, and incentive plans line up. At the same time, proxy advisors such as Glass Lewis and ISS are pressing companies to justify which ESG metrics are used, how they are weighted, and how payouts compare with financial performance.
We have seen that boards get into trouble in three recurring ways.
They choose metrics that sound attractive to stakeholders but do not match the company’s real risk profile or capital plan.
They spread ESG across so many indicators that no single outcome really matters for pay.
They allow maximum ESG payouts even in years when financial or risk outcomes are weak, which invites investor pushback.
Given this context, boards and treasurers should approach ESG metrics in pay plans with the same discipline they use for financial covenants. That typically means:
Focusing on a small set of material, auditable KPIs that reflect core value drivers, such as scope 1 and 2 emissions intensity, serious safety incidents, or customer trust scores that have proven links to revenue or cost of capital.
Calibrating targets and payout curves so that threshold, target, and maximum levels line up with capital market guidance, public sustainability targets, and any KPIs embedded in sustainability linked loans or bonds.
Building in downward discretion where severe risk events occur, even if formulaic ESG scores look strong, in order to maintain credibility with investors and regulators.
Academic work and investor commentary both point to the same conclusion. ESG metrics in pay are most effective when they are simple enough to understand, grounded in externally disclosed targets, and aligned with the way lenders and rating agencies are treating ESG risk.
Our team can assist with setting and welding those same KPIs into the fabric of their financing structures so that executives, treasurers, and creditors are all working off a single set of sustainability outcomes.
Governance essential 2: Align ESG financing terms with the same KPIs that drive pay
Governance essential 2 is to align sustainability linked financing with the same ESG metrics that sit in executive scorecards. When treasurers negotiate sustainability linked loans or bonds that use one set of KPIs, while compensation committees reward a slightly different set, the market receives a confused signal about what really matters. The sustainable debt market reached about 4.8 trillion dollars in cumulative volume by the end of 2022, according to a 2024 sustainable finance primer, noting the rising share of sustainability linked instruments inside that total. Lenders and investors now ask not only whether a bond or loan has an ESG label, but whether the chosen targets are consistent with the company’s strategy, public commitments, and pay plans.
Supervisors are reinforcing this alignment. In January 2025, the European Banking Authority in the European Union issued its final Guidelines on the management of ESG risks, requiring banks to integrate environmental, social, and governance risks into business strategy, credit underwriting, pricing, and monitoring over short, medium, and long term horizons. In parallel, the European Central Bank has already set expectations that banks manage climate related and environmental risks as part of prudential supervision and in 2025 signalled that a climate factor will influence collateral treatment in lending operations from 2026.
Concrete issuer examples show how this plays out in practice, including in emerging markets that are often central to ESG in Australia or ESG consulting USA mandates that span global portfolios. In India in 2024, UltraTech Cement raised 500 million dollars through a sustainability linked loan coordinated by Sumitomo Mitsui Banking Corporation, with six banks participating, to support emissions reduction and higher use of green energy; this was its second such facility after a 400 million dollar deal in 2021, illustrating how repeat borrowers are using margin ratchets tied to decarbonisation goals. In Kenya in 2024, Safaricom secured a second 15 billion shilling sustainability linked loan tranche from a consortium of local banks to fund investments such as converting transmission sites from diesel to renewable energy, with pricing linked to progress against sustainability targets. The outcome in both cases is that credit pricing now reinforces, rather than contradicts, stated climate ambitions.
At portfolio level, the International Finance Corporation reported that sustainability linked financing volumes in emerging markets increased about 327 percent in 2021 compared with 2020, led by Mexico, China, Turkey, Russia, and Brazil, which together represented around 82 percent of volumes in non high income countries.
That growth, combined with the critical scrutiny of deals that use intensity metrics or narrow scopes, means that boards now need a coherent architecture for which ESG outcomes carry financial consequences, in pay and in funding.
Because that architecture is technical, it helps to distil it into a handful of design choices that boards and treasurers actually control.
First, map financing KPIs to the same core metrics used in executive incentives.
Where a sustainability linked loan relies on scope 1 and 2 emissions per unit of output, for example, the long term incentive plan should reference the same metric and base year, not a different footprint definition.
Second, apply the Sustainability Linked Loan Principles consistently when calibrating targets and step ups or step downs.
The updated Sustainability Linked Loan Principles, revised in 2025 by the Loan Market Association, Loan Syndications and Trading Association, and Asia Pacific Loan Market Association, emphasise clear KPI selection and ambitious sustainability performance targets, together with meaningful pricing adjustments. That is exactly the discipline investors now expect to see mirrored in executive pay.
Third, test structure and ambition against both investor expectations and civil society scrutiny.
Analysis from groups such as the Climate Bonds Initiative has highlighted the problem of low quality sustainability linked bonds with weak targets and limited disclosure, and argues that stronger structures will be a prerequisite for growth. Boards should assume the same level of scrutiny will be applied to any ESG linked margin ratchet or coupon step up they approve. Boards should assume the same level of scrutiny will be applied to any ESG linked margin ratchet or coupon step up they approve.
If you are about to refinance a core facility or enter the sustainability linked bond market, a short, focused review that brings together the treasurer, CFO, sustainability lead, and compensation committee chair can reveal misalignments between pay, financing, and disclosure before investors do. External advisers can help design that review and push on the structure, without turning it into an academic exercise.
Governance essential 3: Build a single ESG data and control spine across pay, financing, and disclosure
Governance essential 3 is to create a single ESG data, control, and assurance spine that underpins executive pay decisions, financing KPIs, and external reporting. From 2024 reporting periods onward, IFRS S1 and IFRS S2 have created a global baseline for sustainability related financial disclosures, with a focus on governance, strategy, risk management, and metrics and targets. At the same time, the EU Corporate Sustainability Reporting Directive, effective for large companies’ 2024 financial years, requires detailed sustainability information, including governance of sustainability matters and links to remuneration.
For boards and treasurers, the implication is straightforward. If an emissions intensity figure or safety rate is important enough to set executive bonuses or loan margins, it is important enough to sit within the finance function’s control framework, with audit trails, internal verification, and, where material, external assurance. Practical questions that compensation and audit committees should address together include: who owns the source data and calculation logic for each ESG KPI used in pay and financing; which metrics are subject to external assurance, and on what timetable; how restatements or methodology changes will be handled in incentive and covenant documentation; and how the ESG data platform integrates with risk and finance systems.
Our work with clients shows that this becomes manageable when companies treat ESG metrics as a small, curated set of “critical numbers” subject to standard finance controls, not a long wish list managed in spreadsheets by different teams. Once that discipline is in place, alignment across pay, financing, and disclosure becomes less about heroics and more about routine governance.
Governance essential 4: Put cross functional design and scenario testing at the center
Governance essential 5 is to place cross functional design and scenario testing at the centre of ESG linked pay and financing decisions. A 2025 Harvard Law corporate governance note on ESG metrics in executive compensation highlights that many companies now use ESG factors in both short term and long term incentives, but investors still worry about calibration, disclosure clarity, and the risk of “pay for failure” if targets are not demanding. On the prudential side, the ECB and national supervisors expect banks to use scenario analysis for climate related risks, while a recent ECB study with Oxford University’s Resilient Planet Finance Lab warns that severe droughts could wipe out up to 15 percent of euro area output and expose about 1.3 trillion euro in bank loans to water scarcity risk.
Boards can borrow these techniques. If missing an emissions KPI on a sustainability linked bond leads to a coupon step up, as Enel experienced in 2024 when failing to meet a 2023 carbon intensity target triggered higher coupons on around 10 billion euro of bonds, then it makes sense to ask what simultaneous effect that miss would have on executive payouts, reputation, and future access to capital. Scenario workshops that test a handful of plausible ESG futures, including adverse cases, help boards understand whether their incentive and financing architecture amplifies or dampens risk.
In practice, cross functional design should bring together the CFO, treasurer, chief risk officer, sustainability lead, and chair of the compensation committee to work through a small number of decisions: which ESG outcomes truly warrant financial leverage; how to reflect them consistently in pay, capital structure, and public targets; and what guardrails to use if the external environment or data quality changes. These conversations tend to be more effective in focused working sessions than in large, formal committees.
Given the evolving regulatory landscape and the complexity of ESG data, many boards find value in an external “red team” view on their ESG linked pay and financing structures. The goal is not to outsource accountability, but to stress test whether the chosen metrics, targets, and pricing terms would stand up under scrutiny from regulators, investors, and civil society.
Conclusion: Treat ESG linked pay and financing as a single governance system
Taken together, these governance essentials point to a simple idea. ESG linked executive compensation and sustainability linked financing are not separate initiatives. They form one governance system that tells executives, employees, lenders, and investors what outcomes really matter. In 2025, with IFRS S1 and S2 taking effect, CSRD and CSDDD shaping disclosure and value chain responsibilities in Europe, and banking regulators from the ECB to the EBA integrating ESG into their rulebooks, the cost of getting that system wrong is growing.
Boards and treasurers do not need a sprawling ESG dashboard to respond. They need a small set of material, auditable ESG outcomes that carry weight in both executive rewards and financing terms; a data and control spine that ensures those numbers are reliable; and a cross functional governance process that can adapt to shifting politics without losing sight of long term risk and value.
If your organisation is considering a refresh of its executive incentive architecture, planning a new sustainability linked loan or bond, or preparing for first time reporting under ISSB or CSRD, this is the right moment to test whether your ESG story, your capital structure, and your pay plans are pulling in the same direction. A focused engagement with us can help you identify gaps, prioritise fixes, and design a roadmap that fits your regulatory profile and investor base, without turning ESG into a parallel universe disconnected from the core business.
Written by: Gasilov Group Editorial Team
Reviewed by: Rafael Rzayev, Partner – ESG Policy & Economic Sustainability
Offers over thirty years of policy and economic leadership, advising governments and institutions on ESG policy, green economy strategy, and long term resilience planning.
Frequently Asked Questions (FAQ): ESG linked pay and financing in 2025
1. How common is ESG linked executive compensation in the S&P 500 in 2025, and which metrics dominate?
Public proxy analyses indicate that around 77 percent of S&P 500 companies included at least one ESG metric in executive incentive plans for 2024 filings, a figure that has stabilised after rapid growth from about half of companies four years earlier. Climate, safety, and customer metrics are more prevalent and durable than DEI targets, which have declined under political and legal pressure. For boards, this means prioritising a small number of material climate, safety, and governance metrics that can be defended across cycles.
2. What is the financial impact when companies miss sustainability linked bond or loan targets?
The impact varies by structure, but recent cases show that misses can have real cost. When Enel in Italy missed a 2023 carbon intensity target, a 2024 analysis by the Institute for Energy Economics and Financial Analysis and market coverage from Bloomberg and the Wall Street Journal reported a 25 basis point coupon step up on about 10 billion euro of sustainability linked bonds, adding tens of millions of euro in annual interest costs. Boards should therefore model the combined effect of missed targets on interest expense, credit ratings, and executive payouts before locking in structures.
3. How do IFRS S1 and IFRS S2 change what boards must disclose about ESG and executive pay?
IFRS S1 and IFRS S2, effective for reporting periods starting on or after 1 January 2024, require companies that adopt the standards to disclose governance, strategy, risk management, and metrics and targets for sustainability related and climate related risks, alongside financial information. While the standards do not dictate pay structures, they make it easier for investors to see whether executive remuneration and financing covenants align with disclosed climate and sustainability risks. Boards that link ESG metrics in pay and debt to the same IFRS S1 and S2 disclosures can present a more coherent story to global investors.
4. How should companies in emerging markets design ESG linked loans without being accused of greenwashing?
Emerging market borrowers can start by focusing on a few KPIs that are clearly material, such as emissions intensity, renewable energy share, or safety performance, and then calibrate ambitious but credible targets. Guidance from the updated Sustainability Linked Loan Principles, IFC’s research on sustainability linked finance in emerging markets, and examples like UltraTech Cement in India and Safaricom in Kenya show that lenders and investors look for transparent KPIs, third party verification, and meaningful margin adjustments that reward real progress rather than business as usual.
5. How can boards reconcile US political pushback on DEI with global ESG expectations from investors and lenders?
Boards can separate the ESG components that are most exposed to local legal and political risk from those that are core to financial resilience. In the United States, data from Farient and Reuters shows a sharp reduction in explicit DEI metrics in pay, while climate and governance metrics remain widely used. At the same time, European rules such as CSRD and CSDDD, along with global standards like IFRS S1 and S2, keep pressure on companies to manage climate, human rights, and governance risks in a consistent way. Many global issuers therefore maintain robust climate and governance metrics worldwide, while adapting social targets and language to local legal contexts, and using strong disclosure to demonstrate that overall ESG risk management remains intact.
