Matteo Tonello, managing director at The Conference Board ESG Center.

The number of compensation plans being determined by climate-related metrics at S&P 500 companies has doubled over the past two years, according to a recent report from The Conference Board. This type of compensation rose to 54 percent in 2023, up from 25 percent in 2021. Additionally, the percentage of companies in the Russell 3000 index, that bases compensation on climate-related metrics, rose from 16 percent to 32 percent. The findings were gathered in collaboration with FW Cook, an executive compensation consulting firm, and were based on disclosure data from Esgauge, a data mining and analytics firm.

As companies look to integrate sustainability practices, many are turning to executive performance incentives based on climate and environmental, social and governance (ESG) performance to generate results.

S&P companies are adopting climate and ESG performance metrics into both annual and long-term incentive plans at a steady pace, increasing 12 percent in 2023, up from 7 percent in 2021.

“Companies that have not yet adopted ESG metrics for driving environmental performance should explore this avenue, especially in industries that have a significant environmental impact,” said Matteo Tonello, managing director at The Conference Board ESG Center and author of the report. “When implementing such metrics, companies should tailor them to their unique environmental risks and opportunities, rather than relying on off-the-shelf emission targets.”

A higher rate of adoption of climate-related compensation packages was found within several sectors including energy companies which saw an adoption rate of 68 percent in 2023, up from 37 percent in 2021, and utilities firms which saw adoption rates rise to 39 percent up from 24 percent.

The report also identified several sectors that were less likely to adopt these types of measures, including health care, financial and communication services, despite the fact that these industries having a significant direct and indirect environmental impact.

 Steve Cross, managing director of FW Cook.
“Thanks to the increased familiarity with ESG metrics and access to extensive benchmarking data, companies are better positioned to incorporate ESG measures into their long-term incentive programs,” said Steve Cross, managing director of FW Cook. “Given the enduring nature of many ESG objectives, their inclusion in long-term incentive plans can be a strategic and logical choice.”

The report highlighted that larger companies were more likely to integrate environmental metrics into compensation plans, with 67 percent of Russell 300 companies with revenues of more than $50 billion or more including environmental performance provisions in their compensation plans. Meanwhile, 15 percent of companies with an annual revenue of less than $100 million are also using these metrics.

“Compensation committees should pinpoint and prioritize ESG factors aligning with their company’s overarching, long-term business strategy,” said Umesh Chandra Tiwari, executive director of Esgauge. “As companies embed sustainability more extensively into their operations, it becomes imperative to choose incentives that not only align with a broader societal purpose but also contribute to a competitive edge.”