Posted: October 26, 2021
It’s no secret that climate change is quickly becoming a global crisis that will affect every aspect of human society. If the natural world continues to be exploited, the impact will be devastating for virtually every country on the planet in more ways than one. The problem is that climate change is largely the result of billions of individuals acting in their own self-interest. For example, almost every single corporation in the world chases growth, revenue and profit. If a company is not focused on growing then they run the risk of being put out of business by a competitor and executives run the risk of coming under fire from their board of directors. For most companies, growth means more offices to employ people, factories to build products, and trucks or planes to ship them. Unfortunately, all three of these byproducts of corporate and societal growth are major contributing factors to climate change. Hoping that companies take it upon themselves to reduce carbon emissions is not the most reliable plan since profit and monetary gain often take the forefront as measures of success. Instead, investors are starting to take matters into their own hands. Mainly, investors and shareholders are using "Say On Pay" votes to link compensation packages of top executives to meeting ESG-focused goals. Let’s take a look at whether or not an ESG-focused approach to executive pay will help curtail climate change. What is ESG? If you’re not familiar, ESG is a new compensation approach that takes accountability for environmental, social, and governance factors into consideration. Essentially, investors, boards and governments all want to see that businesses are taking steps to improve the world, not just their bottom line. ESG incentives have been gaining popularity in recent years. Today, just over half of companies in the S&P 500 use ESG metrics in their executive compensation plans. Let’s see if ESG metrics could go a long way in slowing climate change. Major Companies Linking ESG To Executive Pay Unsurprisingly, one of the biggest industries that contributes to climate change is the oil industry. You might think that companies in this industry would reject linking executive pay to ESG metrics. However, that has not been the case. In 2018, Royal Dutch Shell announced that 10% of long-term incentives for executives would be based on reducing carbon emissions. BP Oil, Chevron, and Marathon Oil have all followed suit and included their own targets for executives. These four oil companies are slowly catching up to other major corporations that prioritize ESG metrics when designing executive compensation plans. A few other major companies who have made ESG a determining factor for executive compensation are Apple, PepsiCo, and Caterpillar. Are ESG Metrics Working? At the end of the day, it’s important to scrutinize the “how” behind these metrics, not just the “what”. For example, it’s easy for a company to announce that they want to reduce their carbon footprint in hopes of getting an easy PR boost. However, if they do not create and stick to a plan to do this, then business will just continue as usual. Additionally, ESG metrics are unfortunately difficult to monitor. It’s incredibly complex to calculate how much carbon emissions a massive conglomerate like Amazon is responsible for. Unfortunately, it’s also relatively easy for companies to skew carbon emission statistics in their favor. Moving forward, shareholders will need to make sure that they are holding companies accountable to the ESG metrics that they are setting. Executives can use this trend to their advantage by hiring Executive Compensation Consultants to help capitalize on major corporations' growing propensity to tie executive pay to environmental metrics. To learn more about maximizing executive compensation, visit our Contact Page, or contact us directly by email at firstname.lastname@example.org or by phone at 415-618-6060.