More than half of the ASX200 factors in climate change when determining executive bonuses, new Australian Council of Superannuation Investors (ACSI) analysis shows, but details about how those targets will be met and bonuses awarded are often lacking.
Listed companies have increasingly recognised the importance of managing material climate-related risks and opportunities, and there has been a significant increase in transparency and the setting of climate targets within the ASX over the past five years.
Now, many boards have also introduced climate-related measures in variable executive remuneration incentives. Some companies have developed detailed measures, however, public disclosures often lack sufficient detail for investors to assess what the target relates to and how progress is measured.
“We welcome boards’ recognition that climate risk is a material challenge to be managed, but many companies haven’t made it clear to investors how these incentives work and what is required to achieve them. Without this level of detail, investors are left to wonder if bonuses are being awarded for out-performance or for business as usual,” said Ed John, executive manager, Stewardship at ACSI.
“We would like to see companies providing more detail on remuneration targets in the upcoming reporting season including how performance is assessed. Bonuses, including for climate-metrics, should always be sufficiently demanding to ensure pay is aligned to performance.”
ACSI’s analysis showed that most companies in highly exposed sectors – including energy, materials, industrials, real estate and utilities – have adopted climate-related remuneration metrics within their short or long-term incentives to tie in with broader climate strategy.
“In highly exposed sectors, investors want to see management incentivised to deliver on the company’s strategy, including climate strategies,” Mr John said.
ACSI analysis of the ASX200 found:
- There has been a boom in the adoption of climate-related incentive metrics: 106 of 197 companies assessed, or 54% of companies in the ASX200, have factored climate change into either their short- or long-term executive incentive structures.[1] In March 2021, just 10% of ASX200 entities had a climate-related remuneration metric within executive incentive pay.
- Climate-related metrics are mostly short-term targets: Nearly half of the ASX200 (47%) has incorporated climate-related metrics in short-term incentives (STI), only 11% have included it within their long-term incentive (LTI) structure.
- Weightings to climate metrics are mixed: Most companies do not disclose the specific weighting associated with the individual climate metric in the STI or LTI, it is more common for companies to include climate metrics within broader strategic or non-financial measures.
- A wide range of targets have been adopted: There is a wide range of measures included, with detail varying from specific emission reduction targets to vague and opaque metrics like ‘targeting climate objectives’. This makes it difficult for investors to understand how performance would be assessed, meaning there is a risk of discretionary and questionable payouts.
- High risk sectors integrate climate metrics: Most companies in highly exposed sectors including energy, materials, industrials, real estate and utilities have adopted climate-related remuneration metrics within their STI, LTI or both to tie in with broader climate strategy.
Methodology
ACSI analysed the prevalence and nature of all climate-related metrics adopted by ASX200 companies and disclosed in remuneration reports as at 31 March 2024. Many of these targets relate to managing and reducing emissions, developing low carbon opportunities, progressing decarbonisation projects, or the development of climate-related strategies. These metrics include standalone climate indicators and those included within a broader environmental, social and governance (ESG), sustainability, strategic or individual performance hurdle. Metrics were only included where they were clearly identified and expressly disclosed a climate-related indicator within the remuneration report, either via a corporate scorecard or explanatory information provided on the targets. Climate-related metrics varied in weighting, targets and disclosures across the ASX200, with many scorecards lacking specific quantitative or qualitative measures tied to ascertainable climate targets.
[1] Note: some companies, such as externally managed entities, in the ASX200 are not required to disclose executive remuneration practices. Companies that do not disclose their executive remuneration practices have been excluded.