Institutional investors are making it clear through engagement and voting that they expect boards to actively address climate risks and disclose how those efforts are progressing, including by tying climate metrics to pay. This emerging climate performance perspective follows previous shareholder efforts to encourage companies to disclose industry-specific climate risks such as greenhouse gas emissions.
Companies should anticipate increased pressure to actively mitigate climate risks, whether by reducing their own footprints or building resiliency to regulatory or environmental changes. A recent article in Directors & Boards presents an overview of this evolving governance issue and offers some useful advice on classifying climate risks (such as physical risks or liability risks) and opportunities (immediate opportunities to capitalize on an emerging market sector or long-term, wholesale strategic shifts which may carry short-term pain).
The article cites a
2020 Willis Towers Watson study showing that more than three-quarters (78%) of directors plan to change how ESG is used in the executive compensation plan in the next three years. Directors listed environmental and climate issues as their most pressing concern:
- 41% planned to introduce ESG measures in long-term incentive plans in the next three years
- 37% looked to add ESG measures into annual incentive plans
The US trails major European markets in utilizing ESG targets. Approximately 33% of the largest 350 European companies include an environmental or sustainability metric in incentives, but only 14% of S&P 500 companies do so. Additionally, 11% of European companies have GHG emission reduction targets, compared with only 2% of S&P 500 companies. The article notes that many directors feel CEO tenure trends in the US are working against efforts to build long-term change as
CEO tenure continues to trend down. Further, most corporate plans to radically shift business models have longer timelines than the standard three-year window of current long-term incentives. To that end, the article recommends developing a clear roadmap and establishing short- and mid-term milestone objectives that can be worked into incentive plans.
