Executive Compensation and Climate Targets

Date: 25 March 2021

Host:

Climate Governance Malaysia

Investors and stakeholders are often the ones driving companies to prioritise climate risk. According to Willis Towers Watson (WTW), this focus on stakeholder capitalism and climate isn’t wholly new. This session on executive compensation on the final day of the CGI Global Summit saw the panel argue that these themes came to the forefront at the beginning of 2020 during the coronavirus outbreak, when investors and stakeholders started to vocalise their views on good corporate governance. 

Institutional investors such as BlackRock have gone further than simply setting out their intentions to be more sustainable; they’ve actually taken action against companies they deem as not making sufficient progress on climate issues. A handful of leading companies have started disclosing and pursuing shareholder approval on comprehensive climate-focused transition plans as part of the ‘Say on Climate’ initiative. 

“Companies are beginning to realise the financial tangible benefits of focussing on climate change priorities,” explained Shai Ganu, global head of executive compensation at WTW. The benefits include greater access to capital, higher valuations, preferential interest rates, lower carbon charges and cost of capital, and stronger acceptance from employees and customers. “‘Say on Climate’ could be a very interesting development, as it gives more control to shareholders regarding climate transition plans, and associated impacts to earnings profiles.”

The panellists then went on to discuss the use of remuneration in driving climate resilience at the board level. Shareholders are increasingly able to leverage power to effect positive change and that’s compelling boards to assess the impact of climate risk on long-term value creation. “Companies need to establish transition roadmaps which clarify how their business will align with Paris objectives through different time horizons,” explained Mizra Baig, global head of ESG Corporate Research. “A credible transition plan must include clearly defined and interconnected milestones, which in turn can be converted into performance targets governing bonuses and longer-term share plans. This is the most effective way of incentivising management to take action today to support an objective that will only fully materialise long after they have left the business.” 

Recent research by WTW shows that while ESG priorities vary by geography, industry and organisation, they are often shaped by current events and regulatory frameworks. Increasing numbers of companies in Europe are adding environmental metrics to their incentive plans, while in North America, recent social unrest has accelerated the inclusion of social metrics in incentive plans. However, “it all links back to the role of the board, senior management and… the HR team, to ensure these targets are embedded and woven into the culture and value of the group,” argued CIMB Group Holdings’ Teoh Su Yin.

Read the guidebook from the Climate Governance Initiative, in collaboration with Willis Towers Watson, on Executive Compensation for the Climate Transition