Companies are increasingly using carbon targets as part of their executive pay, according to a joint study by PwC UK and the London Business School which analysed the carbon targets in executive pay at 50 major European companies.

The report reviews the quality of the implementation of ESG targets in executive pay in the STOXX Europe 50 organisations, with a particular focus on climate targets in pay, to see whether they can be included in an effective way that also meets investor expectations. in executive pay, with payouts in carbon targets disclosed in 2022 averaging at 86%, and over half paying out at 100%.

The report also shows that the bigger carbon emitters are more likely to put carbon measures in executive pay, and are therefore more likely to score well against investor expectations.

Almost all companies analysed say carbon is considered in executive pay, but there is a wide spectrum of approaches for how it has been adopted. At one end of the spectrum, carbon is just one item on a list to consider as part of a basket of qualitative ESG measures, while for other organisations, carbon can be a separately weighted quantitative component of the incentive plan tied directly into strategy.

Phillippa O’Connor, workforce ESG leader at PwC, said: “Climate change is having a huge impact on the way businesses operate, with net zero targets, mitigation and adaptation measures of growing interest to investors. Recently we’ve seen an explosion of interest from investors and companies linking executive pay to ESG targets. 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.”

O’Connor added that 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. Linking shareholder objectives to specific climate driven objectives gives leaders a clear definition of success, helps meet investor expectations, and ultimately helps achieve climate goals.

“Yet there are unintended consequences of linking pay to ESG metrics. ESG targets in pay is not always as simple as it seems and should not be viewed as the sole litmus test of a company’s commitments to ESG priorities. The challenge now must be to do it well, so that pay targets make a meaningful contribution to helping companies meet their climate goals.”

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