Electric utilities are taking unprecedented steps to show that pledges to slash greenhouse gas emissions are more than just empty slogans by linking executive pay to climate initiatives.
Duke Energy Corp., for instance, included additions of nonemitting resources as a performance metric in 2021 to help determine top executives’ annual incentive pay. Others, such as Southern Co., American Electric Power Co. Inc. (AEP) and Dominion Energy Inc., have done likewise.
The intent is straightforward: Linking bonus pay to climate action at companies that are among the biggest greenhouse gas emitters is meant as a carrot for an industry where the primary avenue to reducing power plant pollution is the stick of EPA regulation. It comes as influential investors push for action and federal regulators weigh a rule to require climate-related information.
But how effective it’s been is less clear. Some research suggests the incentives, broadly speaking, are working. But drilling into specific executive pay schemes reveals a need to more clearly link bonuses to science-based goals, according to groups that have closely reviewed them.
“We believe that having incentives tied to goals is really important,” said Dan Bakal, senior program director for climate and energy at Ceres, a Boston-based nonprofit that works with institutional investors on sustainability initiatives. “At the same time, there’s a lot of devil in the details. If you have executive compensation tied to weak goals that don’t have enough ambition, then you’re kind of gaming the system.”
Linking executive bonuses to climate action at publicly owned companies is a movement that’s clearly its early days. But it’s a fast-growing trend, and investors, scholars and activists are tracking the progress.
Ceres is part of Climate Action 100+, an investor-led coalition, formed to hold accountable the world’s largest CO2 emitters and press them to act on climate change. The group’s website includes detailed assessments of action by 15 large U.S. electric utilities, including whether executive pay structures include metrics related to addressing climate change.
Shira Cohen, as assistant professor at San Diego State University who researches climate risk and investing, co-authored a global study last year looking at the link between environmental, social and governance (ESG) performance and executive pay across a range of industries.
Of the almost 4,400 companies examined, nearly a third had implemented ESG pay metrics by 2020 compared with just 1 percent in 2011. Most of that increase came toward the end of the last decade, Cohen said in an interview.
The paper traced reasons why corporate boards link pay to ESG performance. Among other things, authors found that companies with significant emissions, such as electric utilities, were more likely to do so, as were companies that make ESG-related pledges like net-zero carbon goals.
The study also concluded that ESG pay does correlate with improved performance when it comes to carbon-reduction and other sustainability goals.
“There’s definitely concern over the rigor of these ESG performance incentives and how effective they are,” Cohen said. “Are they structured to be impactful? Or is it just to tell investors, ‘Yes, we have it, look at us, we’re green.’”
Researchers involved with the San Diego study wrote that its findings suggest companies do not adopt ESG pay merely for “window-dressing” purposes.
Cohen cautioned that the study provides a sweeping view of thousands of companies around the world and results among individual companies may vary widely.
‘Environmental stewardship’
As You Sow, a nonprofit shareholder group that advocates on environmental and social issues, last year zeroed in on efforts by 47 publicly traded companies on the Climate Action 100+ list based on how effectively they linked CEO pay to greenhouse gas reductions.
The “Pay for Climate Performance” report was based on proxy statements filed with the U.S. Securities and Exchange Commission last spring. It concluded that all of the companies either failed to link CEO pay to climate metrics or didn’t incentivize emissions reduction to limit the rise in global temperatures past 1.5 degrees Celsius, the target the United Nations has set to prevent some of the worst potential climate impacts.
All but three of the utilities on the list got a “D” or an “F.”
Companies that received failing grades included no tie between CEO pay and greenhouse gas emissions reductions. Others didn’t provide enough of an incentive to be meaningful, authors said.
“A de minimis thing isn’t useful,” said Rosanna Landis Weaver, As You Sow’s director of wage justice and executive pay. “Our point, in general, is it’s important to do this right.”
It’s often difficult to quantify the percentage of compensation linked to executive pay, but overall compensation packages, especially for utility CEOs, can be large. For instance, Duke Energy Corp. estimated total compensation for CEO Lynn Good last year at $21.4 million. Southern’s Tom Fanning, who is stepping aside as CEO after the company’s annual meeting later this month, earned $24 million in 2022.
Melissa Walton, a research associate who works on As You Sow’s Executive Compensation and Say on Climate programs, said a lack of transparency is another theme in executive compensation disclosures. Investors often face a mystery of how to determine a company’s performance when it comes to climate initiatives, she said.
At New Orleans-based Entergy Corp., for instance, part of executives’ annual incentive compensation is based on how well they do in “environmental stewardship.” The company’s 2023 proxy statement highlights “achievements” in that area, including the company’s progress in reducing the carbon intensity of its generating fleet.
The result is less than clear: Entergy executives were determined to have “overachieved,” reaching 119 percent of their goal despite a 16.5 percent increase in the company’s CO2 emissions rate, to 719 pounds per megawatt-hour in 2022 compared with 617 lbs./MWh a year earlier.
A key factor: Prices for natural gas increased, which led the region’s grid operator to dispatch Entergy’s coal plants more often.
The proxy goes on to list more than a half-dozen other environmental “achievements,” including setting an “interim climate goal” to achieve 50 percent carbon-free generating capacity by 2030 and issuing requests for proposals for renewable energy projects and studying zero-carbon technologies including offshore wind, nuclear and hydrogen.
Nowhere, however, does it specify how the board determined executives achieved 119 percent of their goal.
Entergy spokesperson Neal Kirby said the company’s emissions rate goal is an “important element” of the environmental stewardship component of the short-term incentive compensation and that other quantitative measures and key initiatives are considered.
“Our overall accomplishments across this suite of activity merited the conclusion that we exceeded target performance,” he said in an email response to questions.
Kirby added the Talent and Compensation Committee of Entergy’s board conducts a “rigorous process to determine the financial, strategic, operational, and ESG measures and targets that will be used to determine our incentive goals to ensure they align and support the company’s overall strategic plan.”
Columbus, Ohio-based AEP, meanwhile, rewards executives for increasing the amount of carbon-free generation capacity at its utilities. Often, energy from a wind or solar project will displace fossil fuel generation on the grid and result in lower CO2 emissions, but that’s not always the case.
Meanwhile, AEP’s board excludes from the equation six natural gas plants representing 343 megawatts of capacity because the plants are used as a backup source of power and run infrequently, the company said.
The same gas plants weren’t excluded from the calculation the previous year, making it difficult to know if the company is making progress or not.
Groups like As You Sow and Ceres say they look for science-backed climate targets and clearly stated plans for how those goals will be achieved.
“Optimally what you have is some really ambitious goals with a plan tied to them, and you can see where capital expenditures are going and then you provide some incentives that align with all that,” Bakal said.
The groups agree that among U.S. utilities, Minnesota-based Xcel Energy Inc. does the best for how it ties executive pay to climate progress.
“That’s the standard right now that we would like to see other companies get to,” Walton said. “There’s room for improvement there, too, but clear for investors to understand what their targets are, how they’re incentivizing their CEO to hit those emission reduction targets and plan for long-term value for the company.”
Looking at Xcel
According to Xcel’s most recent proxy statement, almost a third of top executives’ long-term incentive compensation is tied to achieving clearly stated CO2 emissions reduction goals, which are tied to the company’s goal of providing 100 percent carbon-free electricity by 2050.
Results are measured in three-year increments, and Xcel exceeded its target of a 52.5 percent reduction in CO2 emissions compared with a 50 percent reduction target based on 2005 levels, the company said.
The company received a “B” in the report because the group said Xcel’s 2023 target emissions reduction would reduce its direct, or Scope 1 emissions, by 3.27 percent year over year. That is shy of the level recommended by the Science Based Targets initiative (SBTi), a coalition providing science-based emissions reduction guidance.
Xcel disagrees with the SBTi target. The company said it worked with Brian O’Neill, chief scientist at Pacific Northwest National Laboratory and a lead author for the Intergovernmental Panel on Climate Change, to confirm that its emissions trajectory and goals are consistent with multiple scenarios likely to meet the 1.5 C global temperature goal.
“We believe Dr. O’Neill’s analysis of our goals is more robust than SBTi’s targets,” Xcel spokesperson Kevin Coss said in an email.
Xcel’s analysis also considers a longer-term emissions trajectory that better captures actions such as closing a coal unit, which results in large reductions in some years and smaller ones in other years, the utility said.
Groups like As You Sow and Ceres say efforts by other utilities to link executive compensation to greenhouse gas emissions reduction fall short in several ways.
In some instances, utility emissions reduction plans fall short of what the science says is necessary to avoid the worst consequences of climate change.
Other companies reward executives for adding new carbon-free generation, which may or may not directly lead to a reduction in emissions, or they put a tiny percentage of compensation at stake when it comes to greenhouse gas reductions.
Still others, including Michigan-based DTE Energy Co., provide no direct financial incentive for executives to reduce greenhouse gas emissions or make good on net-zero pledges. Or utility climate targets are set so low as to financially reward executives for progress that would have happened regardless of company efforts.
Walton with As You Sow said too often lost in the discussion about executive pay and climate action is the why investors are increasingly putting pressure on companies to reduce emissions.
It is not, she and others argue, because investors like BlackRock Inc. are social do-gooders. They’re trying to make money.
“Having a climate transition plan for these companies, particularly ones where emissions are most material and a risk to their business, will lead to financial success,” Walton said.
So far, it’s unclear whether utility efforts to decarbonize their operations have led to greater profitability. But swapping out natural gas and coal-burning power plants for more capital-heavy wind and solar farms, which have no fuel cost — a strategy Xcel dubbed “steel for fuel” — has become commonplace among utilities today specifically because it can be more profitable.
Cohen, the San Diego State professor, said her research — which was far broader than utilities or other emissions-intensive companies — found no positive association between ESG pay and financial performance.
That may be because the financial benefits of initiatives such as reducing carbon emissions may not be immediate, she said.
“For some of these metrics, the financial impact of it may be seen years down the road,” Cohen said.
In the meantime, critics agree that just having advanced to the point where utility boards are tying climate action to executive pay is progress for an industry that until not so long ago was loathe to even talk about its contributions to climate change.
Said Landis Weaver of As You Sow: “To the extent you are saying to an executive, ‘This is something we’re tracking within and throughout the company’ … it certainly doesn’t hurt.”
