• BDO on COP26

BDO on COP26

 

The COP26 summit, held in Glasgow, brought together heads of state, climate experts and campaigners to agree coordinated action to tackle climate change and pursue the goals of the Paris Agreement and the UN Framework Convention on Climate Change.​​​​​​​ 

To mark this landmark event, we have published a series of pre-COP26 articles and daily digests, written by our very own BDO sustainability experts. 

Below, Trond-Morten Lindberg, CEO EMEA, introduces the notion of organisations using CEO remuneration to keep sustainability at the top of the agenda and leverage action reduce business emissions.  Read on to find out more.

 

Should CEO remuneration be linked to the reduction of business emissions?

 

 

The equation is quite simple - in theory. A portion of short, medium and longer-term executive compensation would be linked to the organisation meeting specific and explicit greenhouse gas (GHG) emission reduction targets.

A number of recent research studies from Europe and North America have identified that more boards will be linking relevant climate action measures to executive incentive plans over the next few years. In a survey by Willis Tower Watson, 78% of respondents indicated that they plan to change how they use environmental, social and governance (ESG) with their executive incentive plans over the next three years - with 11% of European companies already having explicit incentives tied to carbon emissions in place.  Only 2% of S&P500 executives reported emissions-based renumeration.

Remuneration committees are faced with a difficult challenge, due to a lack of standardised climate change performance metrics that could be applied to a wide spectrum of industries. Furthermore, a perception that longer term climate impacts go beyond the duration of the average CEO’s tenure makes it harder to plan for and include climate-based KPIs in shorter term incentive packages.

Perhaps not surprisingly, it’s the heavy energy users and GHG emitters in the oil & gas, utilities, concrete and aggregates, chemical and transport sectors who have put their best foot forward in linking executive rumuneration with emissions goals.

US utility American Electric Power – has Long Term Incentive Plan (LTIP) metrics including ‘non-emitting generating capacity growth.’ This includes ‘nuclear, hydro, wind, solar, energy efficiency, demand response, and storage capacity owned or contracted by the company as a percentage of AEP’s total owned and contracted generating capacity.’ This performance factor measures the increase in the company’s non-GHG emitting generation capacity as a percentage of total generation capacity from January 1 2020 to December 31 2022.

The global group of energy and petrochemical companies Royal Dutch Shell was among the first big oil companies to link pay such as bonuses to fossil fuel reduction targets, such that ‘Sustainable development continues to account for 20% of Shell’s executive scorecard, which helps to determine the annual bonuses awarded to Royal Dutch Shell plc’s Executive Directors. The metrics had equal weighting between Shell’s safety (10%) and environmental (10%) performance.’

Further pressure to take climate change more seriously is increasingly coming from investors and regulators, including linking executive pay to ESG factors.

BlackRock, the world’s largest asset manager, detailed its position on active investment stewardship as follows:

‘We expect a meaningful portion of executive pay to be tied to the long-related metrics and sustained performance of the company, as opposed to short term increases in the stock price. Short term plans could include any metrics aligned with one-year goals, and/or material non-financial metrics that are integral to the company’s strategy. As a result, BlackRock will assess not only total shareholder returns, but also the company’s overall strategy when evaluating long-term, sustainable performance...’

The European Commission is considering whether the existing EU green taxonomy should be extended to cover social issues. The legislation currently under discussion includes some form of mandatory executive (variable) pay linked to ESG factors including reducing carbon emissions, customer welfare and workforce diversity.

Executive ESG-based remuneration would act as a beacon - tying the stated purpose of an organisation (e.g. net zero operations by 2030) with tangible and auditable metrics. However, choosing emissions reduction and other wider ESG measures for executive pay (and calibrating them properly) requires remuneration committees to gather insights from their sustainability, operational and finance teams and challenge existing incentives structures.

For COP26 be a success, clear national emission reduction targets and commitments are required, and not just for net zero in 2050, but for the much closer 2030 milestone year.  

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Trond-Morten is the is the global sponsor of the BDO sustainability programme and responsible for the development of the approach, framework, governance and support around how BDO firms and the BDO Global Office can adopt and integrate sustainability into their business and culture.

 

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Daily Digests from COP 26

Sunday 31 October

Monday 1 November

Tuesday 2 November

Wednesday 3 November

Thursday 4 November

Friday 5 - Sunday 7 November

Monday 8 November

Tuesday 9 November

Wednesday 10 November

Thursday 11 November