The Advisors' Blog

I blogged a few weeks ago that investors are pushing for higher-quality ESG metrics. A new PwC analysis of carbon targets shows they may have good reason to be skeptical. The “TL;DR” is that executives are getting “surprisingly high” bonuses despite the common understanding that we’re making inadequate progress on reducing carbon emissions worldwide. But in both this analysis & the pay plans themselves, the devil’s in the details.

The report assesses carbon targets at 50 of the largest European listed companies – which is the region of the world where linking pay to climate & other ESG targets is most well-developed. It looks at 4 criteria that investors say constitute “robust” targets – namely, that the targets are:

1. Significant – a separate & meaningful percentage of incentives

2. Measurable – objective & quantifiable

3. Transparent – externally clear & prospectively disclosed targets, and

4. Demonstrably linked to long-term carbon reduction goals – clearly disclosed bridge between short-term & long-term

Here are the high-level findings:

While there has been rapid adoption of carbon pay targets in the last couple of years, only one company’s carbon pay measures met every one of our criteria. And payouts on carbon targets disclosed in 2022 averaged 86%, with over half paying out at 100%. This is surprisingly high given the common understanding that we’re making inadequate progress on reducing carbon emissions, which raises the question on whether the carbon targets in pay are working.

The criteria that companies’ carbon measures most commonly failed to meet relate to the weighting (which is frequently quite low), the transparency of targets (which are rarely prospectively disclosed), and their quantitative link to the company’s stated long-term carbon reduction goals (which is often unclear).

Thankfully, the report also notes that many of the current shortcomings are easily addressed – e.g., disclosing prospective targets, adjusting weighting. While executive pay is never going to be the panacea for solving climate change, it can be part of the solution. It sets out 9 questions for boards to consider based on company-specific circumstances (along with examples & recommendations for each). When your comp committee next considers incentive plans, it may be worth diving into these details:

1. Should executive pay carbon targets be based on CO2 or CO2 equivalents?

2. Should executive pay carbon targets be adjusted for transactions?

3. Should offsets count for executive pay purposes?

4. Should executive pay targets use absolute carbon emissions or carbon intensity?

5. Should pay measures include Scope 3 emissions?

6. Are carbon measures relevant for low emitting companies?

7. Should Scope 4 emissions affect targets?

8. Are carbon targets relevant for companies covered by carbon trading scheme?

9. Should executive pay targets focus on new sources of competitive advantage over carbon reductions?

If you’re looking for “gold star” examples & food for thought, the report suggests looking at the companies below – and it also shares a mockup of hypothetical executive compensation disclosure (pg. 19):

A leading example from our analysis of disclosures in 2022 is TotalEnergies, which was the only company to score maximum points on our assessment. They disclose their strategic 2025 GHG reduction target in Mt CO2e, and disclose how their executive pay targets to reduce carbon emissions directly tie into that long-term ambition, by setting a Mt CO2e to hit by 2022, in line with this ambition.

Other positive examples include ABB, AstraZeneca, AXA, Enel, Reckitt and Santander, each of which score seven out of a possible eight points. But in the case of most companies reviewed, there are opportunities for further steps to fully meet investor expectations.

Check out our “Sustainability Metrics” Practice Area for even more guidance on this complex topic.

– Liz Dunshee