A significant increase in the integration of climate metrics into executive compensation schemes suggests a fundamental disconnect between performance and pay outcomes, according to recent research conducted by Pensions & Investment Research Consultants (PIRC).
Of the largest global listed companies employing climate metrics, there was an average vesting level – the proportion of a bonus paid out – of 80%, highlighting the gap between corporate payout culture and the reality of the impacts of climate change on the environment and society.
In its research PIRC uses Glencore as a case study to note this disparity. At its 2022 annual general meeting (AGM), Glencore’s climate transition plan was opposed by nearly a quarter of the total shareholder base – the largest single vote against any climate plan put to UK shareholders in 2022.
Despite concerns raised by shareholders, the element of the variable incentive scheme that captures performance on climate-related metrics vested in full.
PIRC’s analysis found a significant number of companies employing climate metrics in their pay schemes, especially in Europe. But often these are bundled in as part of broader ESG targets making them of questionable value even if they were more challenging than is the case currently.
The report also raises concerns that, now boards appear to have adopted climate metrics that pay out too easily, investors may become distracted by engaging over pay rather than focusing on transition plans and emissions reductions.
The structural problems evident in current attempts to link pay and climate change highlighted in the research are emblematic of the fundamentally flawed attempt to tie a diverse and often conflicting set of business priorities to rewards.
PIRC has long been of the view that these priorities should be considered as directors’ duties – required to promote the success of the company, not optional extras to be rewarded if achieved.
Conor Constable, stewardship manager at PIRC, said: “We question the view that a performance metric representing a fraction of the total opportunity available to executives is a credible tool to drive more desirable climate outputs.”
He added: “These metrics are neither easily measurable nor sensitive to the decision making of executives. If stakeholders are serious about holding decision makers accountable on issues such as climate change, it is necessary to pivot away from highly complex and opaque compensation structures to a renewed focus on the duties of directors and their legal obligation to be responsible for the impact of a company’s operations on the community and the environment.”