Bosses at Europe’s largest companies received “surprisingly high” bonus levels for meeting goals to cut carbon emissions in 2022, easily achieving their targets despite inadequate progress on global warming, the latest executive pay expert report finds.
More than three-quarters of Europe’s 50 largest companies now include some form of carbon target in their executive pay packages, a new report from PwC and the London Business School said.
But the robustness of these targets and the ease at which business leaders were being awarded their “green” bonuses was called into question by the study.
For the carbon target-linked payouts by companies in the Stoxx Europe 50 index disclosed in 2022, half were paid out at 100 per cent of the total available bonus pot, while the average was 86 per cent.
“Current levels of payout don’t seem consistent with the slow progress we’re making on climate change,” said Tom Gosling, executive fellow at LBS’s Leadership Institute and an adviser to boards on pay for two decades.
Gosling said there was a risk that rewards to executives for the “unstoppable” need to address climate change “just results in more pay — not more climate action”.
Companies that have introduced climate-related targets in pay include Shell, where work on the energy transition by the oil and gas group accounts for 10 per cent of the executive long-term incentive plan.
In 2021, Shell awarded 180 per cent of a maximum of 200 per cent of the LTIP that was linked to the energy transition.
In its annual report, Shell said the payouts for then-chief executive Ben van Beurden and former chief financial officer Jessica Uhl came after the group met decarbonisation targets and developed new renewable energy projects, as well as investing in ventures to produce “low-carbon” fuels.
Shell has committed to reducing the carbon intensity of the energy products it sells by 20 per cent by 2030, and by 45 per cent by 2035, but not to a reduction in absolute emissions. This would require bigger cuts to the amount of oil and gas it produces.
The inclusion of climate-related targets in executive pay is relatively new, with many companies only introducing bonuses for meeting green objectives since 2018. It comes as big European investors such as Amundi and Cevian push for businesses to include environmental, social and governance metrics when deciding bonuses.
Harlan Zimmerman, senior partner at Cevian Capital, said carbon metrics in pay packages needed to be measurable and transparent, so that “the company can demonstrate to investors and other stakeholders that its ambition level is sufficiently high”.
“Companies that fail to do that should expect to be accused of greenwashing, and increasingly lose shareholder support for their pay plans,” he added.
In response to the Paris agreement to keep the global temperature rise to well below 2C and ideally 1.5C above pre-industrial levels, about a third of publicly-held companies globally have set goals to cut emissions to net zero by 2030 or 2040.
However, global carbon emissions were estimated to have reached 37.5bn tonnes in 2022, a record high, according to the Global Carbon Project. Emissions from methane also reached near record highs last year. Temperatures have already risen at least 1.1C.
Phillippa O’Connor, workforce ESG leader at PwC, said the inclusion of related targets in pay is “not always as simple as it seems”.
“The challenge now must be to do it well, so that pay targets make a meaningful contribution to helping companies meet their climate goals.”