Most large European companies include carbon targets in executive pay but almost always fall short of investor expectations, according to a recent report.

Paying for net zero: Using incentives to create accountability for climate goals, a collaboration between PwC and the Leadership Institute at London Business School, analyses how well the link between executive pay and carbon targets is working.

The report covers the carbon targets within companies making up the EuropeStoxx50. It said all these companies are talking about reducing carbon emissions, and the vast majority (78%) have now adopted some form of carbon target in executive pay.

The report assessed carbon targets against four criteria, as to whether they are significant, measurable, transparent, and demonstrably linked to long-term carbon reduction goals.

Companies were given one point if they met a criterion at “basic” level, and two points if they achieved “better” level.

Only one company – TotalEnergies – scored the maximum eight points, while ABB, AstraZeneca, AXA, Enel, Reckitt and Santander each scored seven points.

The report said the criteria that companies’ carbon measures most commonly failed to meet relate to the weighting (which is frequently quite low), the transparency of targets (which are rarely prospectively disclosed), and their quantitative link to the company’s stated long-term carbon reduction goals (which is often unclear).

Meanwhile, according to the report, payouts on carbon targets disclosed in 2022 averaged 86% of the maximum, with over half paying out at 100%. This compared with typical average incentive pay-outs on other measures of around 75% over several years.

“This is surprisingly high, given the common understanding that we’re making inadequate progress on reducing carbon emissions, which raises the question on whether the carbon targets in pay are working,” said the report.

Other issues it covered include specific challenges in linking pay to carbon targets, and whether carbon targets are always relevant, or whether alternative approaches will work better for some companies.

And it said that if executive pay is part of the climate goal solution, “There needs to be more ambition to implement carbon targets robustly and effectively, using the power of incentives to support the push for net zero.”

In its foreword, activist investor Ceviant Capital (CC), which contributed to the report, said that executive pay should be used to create incentives and accountability, to ensure delivery of mission-critical sustainability outcomes not reflected in earnings per share or total shareholder return.

It said: “Most relevant companies have added [emissions-linked] pay metrics in recent years, but checking that box is no longer sufficient.”

CC continued: “However, investor urgency is high and increasing rapidly. This report provides a valuable pathway to best practice.”

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