Ambitious sustainability targets â net-zero emissions, improved diversity, and transparent supply chains â were once widely heralded by large corporations. However, as the challenges of achieving these goals become apparent, many companies are struggling to deliver on their promises. Last year's Net Zero Tracker report revealed that only 5% of corporate carbon reduction plans met UN Race to Zero criteria, highlighting a significant gap between aspiration and action. This issue has been prominent at COP29 in Azerbaijan, mirroring concerns raised at COP16 on the difficulties businesses face in meeting nature disclosure guidelines. The realisation that many pledges are proving unrealistic is prompting a reassessment of corporate strategies.
While some firms have quietly backtracked on their commitments, others are actively seeking solutions. A prevalent approach involves linking executive pay to sustainability metrics. A January Willis Towers Watson report indicated that 76% of S&P 500 companies now include at least one ESG metric in their executive incentive plans. Mars, Inc., is a prime example, tying 20% of its executive compensation to sustainability targets. Mars' Chief Sustainability Officer, Barry Parkin, argues that this significant financial incentive compels executives to actively engage with sustainability challenges, moving beyond theoretical understanding to practical action. This approach reflects a strategic move to secure buy-in across all business functions, aligning sustainability with core financial objectives.
The logic is compelling: significant organisational change requires commitment at all levels. However, critics highlight inconsistencies in measurement criteria as a major flaw. While the EU's Corporate Sustainability Reporting Directive (CSRD) provides some guidance, the lack of standardised metrics allows for wide variations in implementation. This necessitates a careful examination of past experiences to inform best practice. While ESG is a relatively new focus, tying incentives to operational outcomes is not. Since the 1970s Occupational Safety and Health Act (OSHA), businesses have incorporated employee health and safety into their operations. This long history offers valuable insights into both successful and unsuccessful incentive strategies.
Early attempts at incentivising safety often resulted in superficial "quick wins," focusing on easily measurable actions like using handrails or avoiding carrying hot drinks, rather than addressing systemic issues. This resulted in counterproductive behaviour, with employees engaging in tokenistic actions to meet targets, neglecting more substantial safety improvements. This illustrates the danger of overly simplistic, narrowly focused incentive programs that can be easily gamed.
More effective approaches have employed data-driven strategies and a holistic approach. Long-term culture change, essential for achieving meaningful sustainability progress, requires clearly defined goals, actionable steps, comprehensive impact tracking, and strong leadership throughout the organisation. Simply linking executive pay to sustainability is insufficient; it must be part of a broader strategic shift in company operations. Rewarding emissions reductions while neglecting other sustainability aspects, for example, creates significant reputational and financial risks. Therefore, linking executive compensation to sustainability targets can be a powerful tool, but it's crucial to embed it within a comprehensive, strategic, and organisation-wide vision. Only then can it truly drive meaningful and lasting change.
