Europe’s ESG Pay Pivot: Between Purpose and Pragmatism

As Europe advances its sustainability agenda, the conversation around ESG-linked executive pay is undergoing a critical shift—from confident leadership to careful calibration.

Once heralded as a symbol of Europe’s commitment to responsible capitalism, ESG pay metrics are now being reconsidered in boardrooms and policymaking circles alike. Not because the commitment to environmental and social progress is fading—but because the balance between purpose and competitiveness is being reevaluated.

Certainly in the Netherlands business leaders and policymakers are openly questioning whether the pace and complexity of ESG obligations—especially those stemming from the Corporate Sustainability Reporting Directive (CSRD)—risk undermining innovation and industrial competitiveness.

Europe is not retreating from ESG. But it is entering a more pragmatic phase—one that demands smarter integration of ESG principles, not just broader expansion.

From Symbolism to Strategy

Over the past five years, ESG metrics have become nearly ubiquitous in European boardrooms. According to Willis Towers Watson (2024), over 93% of large European companies now link executive pay to at least one ESG target—more than any other region globally. But as the practice has matured, so has scepticism. Investors and governance experts are increasingly asking whether these targets genuinely drive impact—or merely pad bonuses with easily achievable goals (Gosling, 2023; Bebchuk & Tallarita, 2023).

Many early ESG-linked pay plans relied on vague or low-bar targets. Executives could check the box on “sustainability” without changing the substance of business as usual. A climate goal set too low—or a diversity goal without teeth—isn’t stewardship. It’s optics.

Investor Influence: Raising the Bar

Shareholders have taken notice. They still want to see sustainability embedded in compensation—but they want it done right.

We saw this in HSBC’s recent adjustment, where it scaled back certain environmental metrics in long-term pay plans after shareholder feedback (Financial Times, 2025). Standard Chartered similarly removed short-term incentives tied to financed emissions while reaffirming broader climate commitments. These changes reflect a more sophisticated approach: prioritize ESG metrics that are measurable, material, and aligned with a company’s operational reality (PwC, 2023). Leading proxy advisors have echoed this shift. ISS and Glass Lewis (2024) support ESG-linked pay structures, but emphasize that these must be outcome-driven and tightly aligned to company strategy to be considered meaningful.

The ESG–Competitiveness Crossroads

What’s new in 2025 is a more public acknowledgment of the trade-offs. In the Netherlands and across the EU, industry groups and national policymakers are calling for a more proportionate application of ESG and CSRD obligations.

The Dutch employers’ federation VNO-NCW, for example, has warned that one-size-fits-all sustainability disclosure rules could burden mid-sized companies and risk Europe’s competitive edge in global markets. Similar concerns have been raised in Germany and France, where policymakers are emphasizing the need for “industrial pragmatism.” Even European Commission President Ursula von der Leyen has proposed a regulatory “pause” to give companies time to digest existing ESG legislation, without stifling growth or innovation.

This moment of reflection doesn’t mean sustainability is being deprioritized—but it does signal a new phase: one focused on implementation quality, strategic alignment, and economic realism.

Smarter ESG Incentives, Not More

This climate of recalibration is not a dismissal of ESG-linked pay—it’s an opportunity to make it more effective.

Instead of proliferating generic sustainability metrics, companies should focus on fewer but more powerful ESG incentives. Targets should be tightly linked to business strategy, tied to measurable outcomes, and substantial enough to influence executive decision-making (McKinsey & Company, 2023; Korn Ferry, 2024). Investors are evolving too: from requesting ESG metrics in executive compensation to scrutinizing their quality and impact (Conference Board, 2024). They understand that accountability only matters if the goals themselves are meaningful.

In this context, ESG-linked pay can remain a strategic lever—not a compliance burden.

Conclusion: Purpose with Pragmatism

Europe isn’t abandoning ESG leadership—it’s refining it. The continent’s strong regulatory foundations, from CSRD to SFDR, remain intact. But implementation is now being tempered by calls for flexibility, competitiveness, and industrial relevance.

This is not weakness. It’s maturity.

For ESG-linked executive compensation to thrive in this new phase, it must serve both sustainability and strategic agility. Done right, these incentives can align leadership behaviour with long-term value creation in a world shaped by climate risk, social expectation, and global competition.

This isn’t about ESG versus growth. It’s about ESG for resilient growth. And that’s not idealism. That’s smart governance.

Additional reading: Automate your ESG reporting with RPA and IDP

References

Bebchuk, L. A., & Tallarita, R. (2023). Are ESG pay links effective or just symbolic? Columbia Law School Blue Sky Blog. https://clsbluesky.law.columbia.edu/2023/06/22/are-esg-pay-links-effective-or-just-symbolic/

Conference Board. (2024). ESG performance metrics in executive compensation: Current practices and investor perspectives. https://conference-board.org/topics/esg

European Commission. (2023). Corporate Sustainability Reporting Directive (CSRD). https://finance.ec.europa.eu/publications/corporate-sustainability-reporting_en

European Securities and Markets Authority (ESMA). (2022). Sustainable Finance Disclosure Regulation (SFDR). https://www.esma.europa.eu/policy-activities/sustainable-finance/sfdr

Financial Times. (2025, March). Big business backtracks on climate goals in top pay. https://www.ft.com (subscription required)

Glass Lewis. (2024). Proxy voting policy guidelines: Continental Europe. https://www.glasslewis.com/guidelines/

Gosling, T. (2023). ESG incentives and executive pay: Risks of virtue signalling. London School of Economics, Sustainable Finance Hub. https://www.lse.ac.uk/granthaminstitute/profiles/tom-gosling/

Harvard Law School Forum on Corporate Governance. (2024). The ESG backlash: Legal and political trends in the U.S. https://corpgov.law.harvard.edu/

Institutional Shareholder Services (ISS). (2024). Benchmark policy updates for 2024. https://www.issgovernance.com/policy-gateway/2024-policy-updates/

Korn Ferry. (2024). Future of pay: ESG and accountability in the boardroom. https://www.kornferry.com/insights/this-week-in-leadership

McKinsey & Company. (2023). Incentivizing sustainability: Linking executive pay to ESG performance. https://www.mckinsey.com/business-functions/sustainability/our-insights/incentivizing-sustainability

PwC. (2023). ESG in executive compensation: Making it meaningful. https://www.pwc.com/gx/en/services/people-organisation/publications/executive-compensation.html

Willis Towers Watson. (2024). 2024 Global executive compensation and ESG trends. https://www.wtwco.com/en-GB/Insights/2024/02/global-executive-compensation-and-esg-trends-2024