The Australian Council of Superannuation Investors (ACSI) released research regarding the adoption of climate related metrics in ASX200 companies’ incentive structures.

Adoption of climate-related performance measures

ACSI research shows 54% of companies in the ASX 200 have included climate related targets into either their STI (short-term incentive) or LTI (long-term incentive) plans, a four-time increase from FY2020. Out of the ASX 200, 47% integrated climate targets into their STI and/or 11% in LTI. Six percent include climate-related metrics in both STI and LTI. Most companies in carbon intensive and high emitting sectors have adopted climate-related metrics into incentive plans.

ACSI’s findings are consistent with Guerdon Associates’ GECN Group 2023 ESG report where global prevalence of ESG measures is predominantly incorporated into STI plans. While we observe increased inclusion in LTI plans globally since 2020, ASX 100 companies seem to be lagging behind global peers on the adoption into LTI schemes. (See HERE).

Measures, modifiers, or gateway?

ACSI’s analyses shows there is significant variation in how these metrics are incentivised, weighted, and communicated to investors.

Some companies use climate-related metrics as a modifier or gateway in their STI plans, affecting overall payouts against sustainability targets. Others incorporate climate targets into the STI scorecard, with weightings varying widely. Most do not disclose specific weightings for individual climate metrics. It is more common for companies to include climate metrics within broader strategic or non-financial measures. When disclosed, climate metrics typically constitute around 10% of STI weightings if separated from other sustainability metrics.

LTI climate-related metrics range from 7% to 60% of an LTI scorecard, but generally account for around 20% of the total LTI. In common with STIs, climate measures are often integrated with broader strategic objectives if higher weightings are allocated. Overall, climate metrics in LTIs are more clearly defined compared to STIs.

Climate metrics and disclosure

ACSI found common climate-related metrics include emission reduction targets, progress on abatement projects, and strategic transformation objectives. ACSI pointed out vaguely disclosed targets and progress measurement makes it difficult for investors to assess the alignment between pay and performance.

ACSI suggests it is important for companies to ensure climate related metrics align with company performance, risk profile and other incentive measures.

The ACSI research is a useful complement to Guerdon Associates’ GECN Group global research. This research tracks ESG measures in executive remuneration since 2020. Findings from our ESG studies show an increasingly long-term and environmental orientation globally, indicating a growing focus on longer-term environmental matters including climate change and carbon emissions (see our April newsletter HERE).

The release of Australian Treasury Exposure Draft legislation on climate-related financial disclosure this January (see HERE) may put pressure on companies for better disclosure on climate-related measures.

Find the ACSI report HERE.

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