Companies have started to turn to carbon targets as part of executive pay outcomes, according to a joint study by PwC UK and the London Business School (LBS).
The report analysed the carbon targets in executive pay at 50 of the top major European companies, looking specifically at the standard of the implementation of ESG targets.
Analysis shows the vast majority (78%) of companies have now adopted some measure of carbon target in executive pay, with payouts from carbon targets disclosed in 2022 averaging at 86%, and over half of those paying out the full 100%. The bigger carbon emitters were more likely to put carbon measures in executive pay, and therefore more likely to score well against investor expectations.
The STOXX 50 companies are broken down into two categories: the ‘Climate Action 100+’ (CA100+) which accounted for 14 out of the 50 companies, and the ‘non-Climate Action 100+’ (non-CA100+) accounting for the remaining 36), to look at differences in approaches.
The carbon reduction strategies are similar between the CA100+ and non-CA100+ groups, with 68% using Science-Based Targets initiative (SBTi) approved reduction plans. The report also highlights that 80% of CA100+ companies that have an explicit carbon measure in pay have a broad statement linking this carbon measure to their long-term company plan (vs 72% of non-CA100+ companies). By contrast, only 10% of CA100+ companies provide a more comprehensive link (e.g. supported by numbers) versus 11% of non-CA100+ companies.
Almost all companies in the report said carbon is considered in executive pay, but there is a wide spectrum of approaches for its implementation. Carbon is just one item on a list to consider in qualitative ESG measures. Carbon can also be a separately weighted quantitative component of the incentive plan tied directly into a strategy.
“Recently we’ve seen an explosion of interest from investors and companies linking executive pay to ESG targets,” said Phillippa O’Connor, workforce ESG leader at PwC. “In fact, 86% of companies have now adopted ESG measures in their executive remuneration policies, as businesses want to demonstrate they are serious about the ESG challenges.
“Climate is the area of ESG with the strongest investor consensus. It’s crucial that leaders are clear on what is important to investors and understand the role they have to play in achieving both financial and non-financial metrics. The challenge now must be to do it well, so that pay targets make a meaningful contribution to helping companies meet their climate goals.”
Tom Gosling, executive fellow, department of Finance Leadership Institute, London Business School, added: “The momentum to include climate targets in pay is unstoppable. But if it’s not done well, there’s a risk that the practice just results in more pay, not more climate action. At the moment most companies aren’t meeting investor expectations for meaningful, objective, and transparent climate pay metrics. But there are some potential quick wins, in particular improving transparency about future climate targets and clearly explaining the link to the trajectory of longer-term net zero commitments.”
The results show a stark contrast to recent research from the Diligent Institute into Irish boardrooms, which concluded that while 52% of business leaders admitted to the importance of ESG criteria in executive remuneration, only 17% were actually doing so.
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