ESG-linked pay incentives seen as top lever for corporate climate action

CDP’s inaugural Corporate Health Check has found that nearly 80% of the companies that are on track to meet their climate targets link sustainability KPIs to executive pay, making this a top lever for climate action.

The Corporate Health Check assesses the climate-related targets and initiatives of nearly 25,000 companies worth 67% of global market value to identify the most impactful transparency and governance strategies for sustainable business.

To achieve that, CDP, in collaboration with the World Economic Forum and Oliver Wyman, particularly looked at companies on track to meet their emissions reduction  and nature targets – just 10% of the sample.

Among those, 78% link executive-level pay to climate outcomes (vs. 48% for laggards): this is an increasingly prominent strategy used by companies to incentivise sustainability buy-in at top management level – and it appears highly effective.

Read also: Executive incentives and long-term vision: Lessons for sustainability governance

Executive pay incentives are just one of the “four key business levers pulled by companies using their data to make the most progress”, CDP adds. On top of that, most companies on track to meet their climate goals already have a 1.5ºC-aligned climate transition plan (64%, compared to 36% for low-performing firms), 41% have established an internal carbon price (vs. 20%) and 87% engage both suppliers and customers on climate topics.

Sherry Madera, CEO of CDP, said: “Disclosure alone cannot deliver action; integrating this disclosure data as a core dataset for key business decisions enables the levers to be pulled and the change we need to see. Companies that embed climate and nature into their strategy, governance, and financial planning are leading the way; yet the reality is that far too many businesses remain on the sidelines, and policymakers must step up to reward Earth-positive leadership and fast-track the transformation our planet urgently needs.”

CDP disclosers perform better on emissions reduction

Though disclosures alone are not enough, they appear to be an impactful first step in taking climate action: on average, companies disclosing through CDP in recent years cut emissions by 2% per annum, even as global emissions rose 1% annually, the report notes.

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However, the effectiveness of disclosures in driving climate action depends largely on the level of ambition shown in these closures. Nearly 50% of global companies assessed meet minimum disclosure expectations, such as Scope 1 and 2 emissions and targets around any emissions scope. 

In contrast, just 10% showed meaningful ambition across all key environmental areas covered. Markers of ambition include reporting on Scope 1 to 3 emissions and nature impacts, having meaningful environmental targets set, setting up strong sustainability governance and strategies, and making tangible progress on environmental goals.

Many companies still fall short

Only 1% of companies disclosing to CDP are considered to be “charting change”: these present full value chain emissions disclosures, report on the majority of material nature topics, net zero or SBTi-approved climate targets and nature targets. They support that by pulling on all four identified change levers and aligning investment with transition plans. 

“The steep increase in disclosures, especially in the US and Asia, reflects the continued growth in focus on environmental topics by corporations across the globe, in spite of headwinds,” said James Davis, Partner, and Co-head of Climate and Sustainability, Europe at Oliver Wyman. 

“There is evidence that this is starting to translate into results and emission reductions. However, while some organisations are making progress, many fall short, particularly in moving from disclosure to action (...) Leadership in sustainability can go hand in hand with strong financial performance, provided there is a supportive economic and policy framework.”