Shareholder advocate As You Sow has launched a new tracking initiative to follow whether and how companies link incentive payouts to greenhouse gas emission reductions through standalone, explicit metrics. The
initial report focuses on 48 carbon-intensive companies and highlights four specific examples:
- AES - Linking 5% of the annual incentive to decarbonization through reduced GHG emissions and 5% for progress on strategic capital initiatives such as building an energy storage joint venture.
- Ameren - 10% of the performance share grant is tied to hitting three-year targets for power generation through renewable sources and increased energy storage capabilities.
- Marathon - 5% of the annual incentive linked to reduced “greenhouse gas intensity.”
- Southern Company - 10% of LTIP is linked to reduced carbon-intensive megawatt generation (either by increasing zero-carbon megawatts or reducing megawatts generated by coal or gas). The 100% payout target is based on the trajectory needed to meet the company’s goal of a 50% GHG reduction by 2040.
The report highlights several other companies that include climate risk concerns in their incentive plans, but not through a stand-alone metric or where the exact nature of the goal is unclear. For example, Duke Energy is highlighted for publicly disclosing 2021 annual incentives linked to progress against 2030 goals to cut their carbon footprint by 50% and achieving net-zero emissions for electricity generation by 2050.
Though few companies currently link pay directly to reduced emissions, the report seems to anticipate that numbers are rising. While climate change poses regulatory, legal, and operational risks to companies, it is not clear that mainstream investors would support a larger proportion of pay tied to non-financial metrics such as climate change. If financial performance is strong and there are payouts for emissions reduction targets, investors will not likely protest. But if a company underperforms financially and pays out a large amount for climate-related metrics, will investors raise concerns? It remains to be seen, but companies may have some cover as reports of investors criticizing a company for reducing climate risk could pose a reputational risk to investment management companies.
