Companies are increasingly using carbon targets as part of executive pay outcomes, according to a joint study by PwC UK and the London Business School (LBS) which analyses the carbon targets in executive pay at the STOXX Europe 50 constituents.

Analysis shows that the vast majority (78 per cent) of companies have now adopted some measure of carbon target in executive pay, with payouts in carbon targets disclosed in 2022 averaging at 86 per cent, and over half paying out at 100 per cent. 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 at the other end, carbon can be a separately weighted quantitative component of the incentive plan tied directly into strategy.

Phillippa O’Connor, workforce ESG leader at PwC commented: “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.”

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