Research Report: Getting to Net Zero the Role of Reward

Achieving the targets set by most major economies for ‘Net Zero’ greenhouse gas emissions is an unprecedented challenge, the scale of which may not yet have been understood or acknowledged. It will involve a level of social upheaval and economic change hitherto only brought about by wars or major disasters. As Sky News economist Ed Conway said, “If Net Zero is going to happen we need to re-do the industrial revolution all over again. It’s hard to express how big a deal this is.”

Investors proclaim loudly that they are already on the case, via their demands that environmental and stewardship criteria should be built into executive reward. More than three-quarters of Europe’s 50 largest companies now include some form of carbon target in their executive pay packages.

But how much real difference is this making? A study by PwC and London Business School questioned the robustness (and even relevance) of these targets – and the ease with which business leaders appeared to be achieving their ‘green’ bonuses. Half were paid out at 100% of the total available bonus pot, while the average was 86%. As the report’s authors remarked: “Current levels of payout don’t seem consistent with the slow progress we’re making on climate change.”

Part of the problem has been due to companies setting incentive plan targets linked to broadly defined environmental, social and governance goals, rather than specifically focused on the delivery of Net Zero. In a rush to be seen to be doing something, inappropriate ‘off the shelf’ measures are often used. Companies may therefore ‘hit the target but miss the point’. Executive reward must provide the critical focus to support the required changes. Otherwise, there is a risk that politicians will lose patience – and respond with regulation.

The purpose of this report is therefore to examine the environmental measures companies are currently using in executive incentive plans and why these might not be achieving the intended outcomes. And to assess the changing regulatory environment and look at ways companies might more clearly focus their targets and incentives on the longer-term achievement of Net Zero.