Picture: 123RF/VDWOLF
Picture: 123RF/VDWOLF

Executives from Barclays, BlackRock, JPMorgan and other big names in finance will gather with hundreds of investors at a UK summit on October 19 to extol the virtues of green investment and fighting climate change. But how many of these leaders are directly and personally invested in cutting emissions or cleaning up portfolios through their executive pay schemes?

Disappointingly few.

To be fair, setting incentives for top executives is a complex balancing act: The details are crucial to ensure that targets fit the strategy and are meaningful. But the top executives who must hit climate goals to get all their pay are making their peers look intransigent.

Lots of companies claim to have environmental, social and governance metrics in pay. For example, a recent Alvarez & Marsal survey found three in five FTSE 100 companies have bonus plans with ESG elements. But most targets are social; and those can include such altruistic goals as improving net promoter scores from customers, or employee engagement. That hardly seems the point of ESG.

A better survey from Willis Towers Watson found that only 11% of European companies have incentives tied to carbon emissions. Among the S&P 500, that falls to 2%. Even then, common aims include such basic steps as “get an assessment done of our emissions,” says Shai Ganu, an MD at Willis.

However, Ganu says, those goals improve rapidly at companies with climate goals in long-term incentive plans rather than just annual bonuses. 

Royal Dutch Shell , the oil group, was among the first energy firms to put emissions into long-term executive pay. It measures carbon intensity rather than absolute reductions in emissions. While that can come in for criticism because it still allows for overall growth, Shell is trying to account for emissions by everyone who uses its fuels — not just the emissions it produces directly.

From this year onwards, 20% of the long-term bonus of Shell CEO Ben van Beurden will be based on whether he meets a target for cutting carbon emitted per unit of fuel used, along with investments in carbon capture and green fuels. That’s twice the percentage of his bonus since 2019. It sets a good standard.

Emissions from a company’s full customer base and supply chains are classified as Scope 3 (Scope 1 is the direct output of your buildings and activities; Scope 2 is the indirect emissions of your immediate operations). Scope 3 is by far the most important for banks and investors because it provides a full picture of the climate risks of the companies they lend to or whose shares and bonds they own. 

Lots of firms have at least begun talking about aligning their portfolios with long-term net-zero targets. But for many talk still seems about as far as it goes.

Even Larry Fink, CEO of BlackRock and a vocal proponent of ESG issues, has no measurable climate targets in his pay, only steps the firm is taking to raise awareness. His company, the world’s biggest asset manager, ranks concern about climate change as key to being good shareholder. It says climate risk is key to long-term shareholder value and it advocates rigorous targets for other companies to cut greenhouse gases. It also says pay is important for incentivising managers to hit strategic targets and create long-term value. But BlackRock won’t advocate for specific pay metrics related to climate or anything else among the companies it owns.

Others in the finance industry are more exemplary. Jes Staley, CEO of Barclays, now has 10% of his long-term incentive plan linked to tracking the emissions of companies it finances through lending and capital markets. Barclays has created its own methodology for this. It must be audited and assessed over time to ensure it meets its goals. Still, Barclays is more ambitious than most.

JPMorgan this year set targets to reduce carbon intensity by 2030 among clients it finances in car-making, electric power and oil and gas. It plans to set similar targets for aviation and pulp and paper by the end of next year. None of this is in the bonus scheme of CEO Jamie Dimon or others in the top team.

Others like Bank of America  and Macquarie Group of Australia (whose CEO Shemara Wikramanayake will speak at the UK summit) have plans to set science-based targets for emissions among their borrowers in the future. Bank of America said it will disclose financed emissions no later than 2023; Macquarie wants to work with others to develop better industry metrics. Measurement is hard, both in terms of getting hold of the data required and analysing it well. And too many firms may be using this as an excuse for inaction.

What lenders and asset managers are doing right now matters to the climate. “Lenders’ decisions now are financing the emissions — or non-emissions — of the next 10-20 years,” says Pedro Faria, strategic adviser at CDP, a global charity that promotes science-based targets and disclosure at large corporations. “But remember in 10-20 years’ time, emissions need to be 80% lower.”

Setting targets and hitting them is crucial. And having CEOs directly invested in them is a very good way to focus management minds. It might be hard to do, but some are already getting there. Their peers should catch up.

Bloomberg Opinion. More stories like this are available on bloomberg.com/opinion

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