Businesses are increasingly tying executive pay to environmental performance, transforming what was once an ‘exceedingly rare’ practice into a regular occurrence, a new white paper by the Institute for Sustainable Finance (ISF) has found.
According to the white paper, From Ambition to Accountability: Trends and challenges in linking executive compensation to environmental goals, the adoption of environmental performance metrics in executive compensation packages ‘surged’ between 2016 and 2022.
Compensation packages
“These findings are great news for anyone who feels corporations need to do much more on climate and the environment,” commented ISF Research Fellow, Dr. Pierre Chaigneau, one of the authors of the report. “Now, to ensure real impact, companies need to carefully select targets and design compensation packages to prevent executives gaming the system.”
Early adopters of this mechanism included firms in carbon-intensive sectors such as petroleum, natural gas and utilities, with these sectors accounting for close to two thirds (64.5%) of environmental goals integrated into executive pay among S&P 500 companies.
The most common environmental performance incentives focus on climate change and energy use (49%), followed by environmental protection (32%) and resource efficiency (7%), with many firms also including multi-goal strategies in the executive pay model.
Quality and transparency
However, the report also notes that the quality and transparency of these incentive structures warrants further attention, with the majority of environmental targets are still tied to short-term cash bonuses – accounting for 81% of incentive awards – raising concerns about the potential for greenwashing. Longer-term incentives, such as Restricted Stock Units (RSUs), make up just 17% of incentive options.
In addition, many firms are often responding reactively to external demands, rather than ‘proactively catalysing genuine environmental reforms’, the report suggests.
“This research has produced striking findings but there is still much more to explore as part of this continuing project,” added report co-author Dr. Paul Calluzzo. “We want to learn what factors drive some firms adopt these standards while others don’t? Which stakeholders are influential and how can they impart policy change at a firm? Is all of this leading to more sustainable, greener ways of doing business?” Read more here.
