A study by shareholder advocacy NGO As You Sow (AYS) finds that the 47 US companies that are members of Climate Action 100+ (CA100+) either don’t link CEO pay to climate metrics or their metrics are not aligned with global 1.5° C emissions reduction goals.
- As You Sow assessed the link between CEO pay and climate metrics at 47 US companies that are part of Paris-agreement aligned Climate Action 100+.
- Among the net-zero company benchmark indicators set by Climate Action 100+ is effective board oversight of, and remuneration linked to, delivery of GHG targets.
- Climate Action 100+ looks to influence systemically important companies responsible for up to 80% of the global GHG emissions to align their business strategies with the goals of the Paris Agreement.
The study found that linking climate-related metrics to executive compensation was sporadic, lacked transparency in quantification, and was often not part of the long-term incentive plan (LTIP).
The US companies assessed were on CA100+’s focus list, yet had not made significant progress on their 2050 net zero commitments. The investor-led initiative largely engages with companies via proxy engagements, an area in which executive compensation is discussed and decided.
US heavy emitters short on climate-metrics in long-term incentives
An assessment by AYS of 47 of the largest greenhouse gas (GHG) emitting US companies on linking CEO pay to climate metrics, assigning points and grades (A-F), found that most of the companies (42 out of 47) receive a grade of D or F, with 25 not providing any explicit link between climate-related metrics and CEO compensation.
Of the 22 that provided some link, a minority (23%) linked climate risk metrics to long-term incentive plans (LTIP), which is typically the largest part of executive compensation. In fact, Xcel Energy (NASDAQ:XEL) was the only company to tie a measurable amount of long-term incentives to emissions reductions goals, and received the highest grade (B).
- Of the remaining 21 companies, fifteen had some link between climate action and pay, and six specified a quantitative incentive. No company received an A grade.
- Poor transparency in proxy statements made it difficult to make quantitative assessments on linkages between pay and climate action.
Conclusions drawn by AYS were the need for quantifiable and measurable climate-change objectives to be clearly linked to specific awards for achieving them, and the need to have more than one metric, which did not get ignored among many non-climate related ones.
Most importantly, the report calls for climate-metric incentives to be part of the LTIP, rather than the annual bonus, as it provides a better gauge of performance on long-term metrics.
Purpose of the study
In response to rising concerns from climate action groups and investors to act on climate change, companies are increasingly making net zero pledges. But progress towards these goals, and interim targets set, raise serious concerns over these pledges being met.
Linking executive compensation incentives to science-based GHG reduction goals is part of the CA100+ net zero benchmark, a set of climate expectations put forward by 700 of its investor and asset manager members, accounting for over $68 trillion in assets managed.
A major finding of the study was the lack of long-term incentives on climate change for senior executives. Awards and incentives in the form of performance shares, options and restricted stock can make up 60-70% of CEO pay, and are usually paid out over three years.
The study quotes research by US proxy advisory firm Glass Lewis which finds that while 48% of the S&P 500 had some form of ESG consideration in executive bonuses, only 4% included it in their LTIP.
AYS’ review of proxy statements also found that inclusion of ESG metrics in annual bonus plans can be vague and difficult to measure, like participation and discussion of sustainability issues and solutions with employees on a periodic basis.
Further, compensation committees at the board level had less oversight over LTIPs, which almost implies a guaranteed pay out, while annual business payments could be changed based on committee discretion.
Are Climate Action 100+ members walking the talk?
An investor-led initiative driving climate action, CA100+ plus has been in operation since 2017, and has the power of investors with $68 trillion in assets under management. Its major route of affecting climate action is by engaging with company boards during proxy season.
Entering the final year of the first phase of operation, a review of the results of its engagement with 166 companies on its focus list showed that many are not making enough progress to achieve their net-zero commitments by 2050.
This list consists of companies deemed systemically important to the global transition to net-zero emissions. CA100+ expects to drive these companies to action ahead of the proxy season, which can run up to 6 months after the fiscal year closes.
In its latest round of assessments CA100+ found that while many companies have made net zero commitments, urgent and swift action was needed to support global efforts aligned with the Paris agreement, as many had also not set detailed spending plans, or interim targets.