Most US-based corporates not linking executive pay to climate action, analysis finds

The analysis assessed 47 of the US's highest emitting listed companies

Shareholder organisation As You Sow has this week published an analysis of the links between executive pay and ESG at 47 of the largest listed companies in high-carbon sectors in the US.

More than half of these companies (25 of the 47) have not explicitly linked any kind of climate-related action or target to the remuneration for their chief executive. Of the firms which do make this link, only six link compensation to a quantitative (time-bound, numerical) climate goal. Only one firm, Xcel Energy, links compensation to a quantitative target to reduce absolute emissions.

The analysis concludes that none of the companies is “adequately” reflecting the need to align with a 1.5C temperature pathway in its CEO pay approaches.

This suggests that many firms are prioritising other parts of the ESG agenda in links to executive pay, even when climate is a more material issue. In 2021, more than half (52%) of the S&P 500 companies reported linking ESG metrics to CEO compensation. This proportion is likely to increase again, beyond the 60% mark, for 2022.

As You Sow noted that it was challenging to assess which firms were linking CEO pay to climate targets due to a lack of joined-up disclosures. Poor transparency meant it had to conclude that many firms were making “ineffective” links. For example, the difference in pay could be negligible, and/or the climate target unambitious. Another issue could be that the incentive plan could only be short-term.

The organisation is warning that investors are likely to push the companies that they back for more information on this topic and for a strengthened approach in the coming years. The US Securities and Exchange Commission (SEC) has notably proposed new mandates to standardise climate reporting, with a particular focus on indirect (Scope 3) emissions and climate risk.

As You Sow’s senior manager for wage justice and executive pay, Rosanna Landis Weaver, said: “Many executive compensation plans are complicated and confusing. “It takes a thorough understanding of both executive compensation and climate change to evaluate these pay metrics. This report is intended to help investors understand best practices in incentivising the attainment of strong climate goals.”