Climate metrics, once the purview of only a handful of oil/gas and utility companies, have quadrupled in prevalence among the S&P 500 in the last three years – from just 12% in 2021 to 44% in 2023.
A recent WTW report on ESG incentives across the globe found the following on climate metrics:
- Industries. While in the past, the use of climate metrics was highly industry-dependent, that completely changed in 2023. This is true especially for large companies (66% of companies over $50 billion now use climate metrics).
- Metrics. In the U.S., carbon emission reduction is by far the most common metric at 27%, followed by sustainability (13%) and energy transition (11%).
- Look to Europe. Climate metrics are even more prevalent in Europe, where a staggering 80% of companies use them, often in the long-term plan.
A Closer Look. Of particular interest in the WTW report was the tidbit that 12% of U.S. companies now have an ESG metric in the long-term plan – more than triple the number in 2019.
Given the long-term nature of environmental abatement, if your board is considering a climate metric, best practice is to include it in the long-term incentive plan, according to a new study by Stanford’s David Larcker and team.
What it says: The study notes that about half of large public companies now publish carbon emissions targets, and a third have “pledged to achieve net zero emissions by 2030 or 2050.” This may have driven the explosion of companies tying climate to pay – not to mention impending SEC climate rules.
Professor Larcker interviewed a group of leading companies that tie climate to pay on the what, the why and the how. See his findings below:
- What: Climate metrics often trickle down from executives to plant or supply-chain management, and are largely focused on Scope 1 or Scope 2 emissions. Unlike with diversity metrics, there are more opportunities to vet climate targets through external firms and with peers.
- Why: Studies have found that companies with climate metrics in the incentive plan do in fact show reductions in emissions and better ESG scores. The companies Larcker interviewed cited CEO or board enthusiasm or company strategy and brand as major drivers of adding climate metrics to the plan.
- How: Companies describe a phased-in implementation, starting with backtesting metrics and leading to incremental commitments. The Board is fully engaged, especially on the following metrics questions:
- Should we move to science-based targets or stay with qualitative?
- Should we move climate metrics from the annual to the long-term plan given their long-term nature?
- What is the consequence if annual goals are not met?