Non-profit financial think tank Planet Tracker has urged companies to use bonus structures to incentivise executives to hit sustainability goals.
In a new report The Sustainability Pay Gap: An Analysis of Executive Compensation in the Chemicals, Consumer Goods and Transport Sectors, Planet Tracker said investors are exposed to risk if sustainability targets are missed.
The report provides investors with key metrics to assess sustainability-linked executive pay schemes. It analyses 31 listed companies in the transport, consumer goods and chemicals sectors – industries known to have substantial environmental impacts.
The research found that all 31 companies have a sustainability policy and goals, however more than a quarter (26%) had no link at all between sustainability and executive pay.
Some 42% had no link between short-term compensation and sustainability, while 55% of companies analysed had no link between long-term compensation and sustainability.
With long-term incentives often representing 75% or more of a CEO’s total pay package, including a sustainability target in this scheme is likely to be a more meaningful incentive to take sustainability seriously, argued Planet Tracker.
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In the consumer goods sector, Target, Walmart, Home Depot and Woolworths Group all have climate targets and have published sustainability-related statements from executives, suggesting a commitment to sustainability. Yet, the companies disclose no link between executive pay and sustainability performance.
In contrast, Danone, Nestlé, Coca-Cola and Unilever ranked top for quantitative links between sustainability and compensation in their long-term incentive plans. However, consumer goods ranked worst of the sectors, with 36% of the analysed companies displaying no link between pay and sustainability performance at all.
Richard Wielechowski, senior investment analyst at Planet Tracker, said: “Corporates are telling us that environmental breakdown could be a material risk to their businesses. In response, it is positive that many are making commitments to address their environmental footprints. However, over the long term, backsliding on sustainability commitments will pose a serious reputational and business risk. To mitigate risk, investors will want to see executives held to account for meeting these commitments through their long-term incentive packages.
“Investors must question whether existing CEO pay schemes adequately incentivise progress towards sustainability goals. Failure to create deeper and more meaningful links between compensation and sustainability targets will only increase investor and corporate exposure to materiality risks.”
This analysis of transport, consumer goods and chemical companies builds on the previous research finding that of 39 plastic-related analysed, 16 (41%) had no link between sustainability deliverables and pay. Of the 30 textile companies analysed, 17 (57%) were found to have no sustainability compensation link. Of five major advertising agencies, only one (20%) showed no link between pay and sustainability performance.
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