Link: ICD Article - Should Climate Priorities be Embedded into Executive Compensation?

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Should Climate Priorities be Embedded into Executive Compensation?

‍By Kenneth Yung, CFA, Founder & Partner, Laulima Consulting Inc.
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‍Why Compensation Matters for Climate Governance
The Canadian Sustainability Standards Board (CSSB) recently introduced new climate and sustainability-related disclosure standards for Canadian companies. While these disclosures are not yet mandatory under Canadian securities legislation, momentum is building toward greater consistency, comparability, and transparency in climate and sustainability reporting.For boards, this evolution has created a broader shift and implications for climate governance as noted in the August article. Climate and sustainability performance are no longer peripheral considerations – they are central to long-term value creation, risk oversight, and competitiveness. One of the most visible and effective ways to reinforce this alignment is through executive compensation.When boards link pay to climate and sustainability outcomes, they signal that these priorities go beyond compliance and disclosure. Climate and sustainability goals have become embedded in decision-making, capital allocation, and accountability. The conversation has moved past whether to include sustainability metrics in pay; the challenge now is how to design those linkages in a way that drives meaningful impact and builds credibility.‍

‍The Canadian Landscape
Canadian companies have made notable progress in integrating Environmental, Social and Governance (ESG) metrics into executive compensation programs, though the level of maturity varies considerably.

• As reported in Laulima’s 2024 TSX60 Executive Pay Insights, more than two-thirds of TSX60 companies now include at least one ESG metric in their incentive plans. Environmental and social metrics remain the most common, while governance metrics are less prevalent. Most measures are short-term in nature, focusing on operational emissions or safety, with few embedding long-term transition or decarbonization goals.
• In short-term incentive (STI) programs, the median weighting for ESG metrics remained steady at 15%, though several issuers have signalled higher emphasis for 2025.
• ESG integration into long-term incentive (LTI) programs remains limited but continues to expand. In 2024, 22% of TSX60 companies (up from 15% the prior year) included ESG metrics in LTI plans led by the energy sector at 33% prevalence.
• Among those including ESG in LTIs, the typical weighting was approximately 10%. Climate-related metrics are gradually emerging in the LTI programs of energy and resource companies, though adoption remains cautious as progress can be more difficult to measure.

In short, we continue to see increased adoption of ESG in Canada, but climate-specific goals remain relatively new and emerging. Looking globally provides valuable perspective on how leading companies are integrating climate accountability into incentive design.

‍Global Landscape
Globally, companies are moving faster and embedding sustainability and climate-related incentives more deeply. KPMG International research indicates that 78% of large publicly-listed companies1 now include sustainability measures in executive pay, often linking them to both short- and long-term incentives.Outside Canada, there tends to be:

• More companies are including sustainability and climate-related metrics in long-term incentives, linking LTI or deferred compensation to transition milestones.
• Clearer disclosure and a more substantial weighting, often 10-30% of total incentive opportunity.
• Stronger regulatory and investor pressure to treat climate targets as critical financial and strategic imperatives rather than simply subjective reputational commitments.

In the US, momentum had been building around integrating ESG-related outcomes into executive and employee incentives, reflecting a shift toward more forward-looking governance. However, due to intensifying political and investor pushback, recent progress has been limited. Developments such as the Environmental Protection Agency (EPA) proposal to withdraw the legal foundation for U.S. greenhouse gas regulations illustrate the fragility of policy alignment.In the EU, regulatory frameworks require companies to disclose how remuneration aligns with sustainability, including the proportion of pay linked to climate goals (source). This has led to greater precision and quality in target setting.In the UK, governance and reporting requirements continue to expand (source), prompting boards to articulate more clearly how ESG objectives influence pay design. Some large companies have transitioned climate-related measures from annual bonus programs to LTI plans, reflecting their evolving longer-term strategic importance (source).While Canadian boards face less prescriptive regulatory pressure, investor expectations are rising. As global standards converge, Canadian issuers are increasingly being evaluated against international benchmarks for accountability and disclosure.

‍Design Considerations for Boards
As boards explore integrating climate and sustainability goals into incentive programs, it is important to ensure that the following be considered:

• Impactful: Prioritize metrics that show a demonstrated link to driving business value (e.g. emissions intensity, transition milestones, etc.) rather than broad ESG baskets.
• Timeframe Matches the Metrics: Long-term transition targets require a multi-year commitment and belong in longer-term programs.
• Meaningful weighting: A token 5% metric risks undermining credibility. Meaningful weightings demonstrate genuine commitment and ensure that outcomes influence decision-making and payouts.
• Measurable & Quantifiable: Qualitative or overly subjective measures can dilute accountability; clearly defined, quantifiable targets are more effective in driving the right behaviours and demonstrating progress.
• Clear Disclosure: Clear targets and transparent assessment / outcomes build trust with shareholders and investors.
• Clear Governance Process: Establish clear oversight for setting, verifying and assessing results to avoid perceptions of “greenwashing.”

‍What Leading Companies Are Doing
Leaders are cautiously experimenting with climate-linked incentives, but they remain careful not to over-index. Regulatory uncertainty – from shifting Canadian and US climate disclosure requirements to contested emissions targets – makes boards hesitant to implement aggressive climate goals in three-year LTI cycles. Notable examples (from 2025 disclosures) include:TSX60 Examples

• Fortis previously measured achievement against its 3-year average forecast of scope 1 carbon emissions, weighted at 10% in its 2024 LTI plan. For 2025, Fortis shifted to a new climate-related performance measure that focuses on actions and outcomes that support climate adaptation and mitigation and reduction of GHG to reduce emissions over time.
• Enbridge uses reduction of Greenhouse Gas (GHG) Emissions Intensity in both its STI and LTI. It is part of the strategy and execution bucket (weighting for GHG not disclosed) within the STI and it is weighted at 10% (measured at the end of three years) within its performance-based LTI. /li>
• Saputo uses dual environmental measures (CO₂ Reduction and Water Intensity Reduction) measured at the end of three years, weighted at 30% of the performance-based LTI.  

Global Examples

• Dow uses an Ambition metric weighted at 20% within the STI program, that includes sustainability and environmental stewardship. Within the performance-based LTI plan, Dow uses an average of Scope 1 and 2 Carbon Emission Reduction Metric weighted at 20% with clearly defined 3-year reduction targets.
• Unilever uses a Sustainability Progress Index metric weighted at 15% within its LTI plan, consisting of four metrics (climate, nature, plastics and livelihoods) which have clearly defined 3-year performance targets for each metric.
• Starbucks uses a Sustainability Modifier within its long-term incentive plan, allowing payouts to be adjusted by up to ±10% based on performance against defined and disclosed greenhouse gas emission reduction targets.

These examples signal a shift toward more substantive and/or longer-term performance-linked approaches, even as companies maintain a cautious stance given the fluid policy environment.

From Compliance to Long-Term Value Creation

For boards, climate performance has evolved beyond a “check-the-box” compliance exercise. Investors, regulators, and employees increasingly expect a tangible connection between climate ambitions and executive accountability. Additionally, proxy advisors such as Glass Lewis have cautioned against incentivizing for “table stakes” (i.e. prerequisites for executive performance) as opposed to behaviours and conditions that need to be incentivized (source).

The likely path forward will be incremental. Climate-related metrics are expected to expand across both short- and long-term incentive plans as companies gain confidence in setting robust, measurable targets informed by historical performance data. Weightings may remain modest until greater policy stability and data maturity are achieved.

Pay structures that credibly reinforce climate priorities are emerging as pillars of strong governance, risk management, and strategic foresight. The challenge (and opportunity) for Canadian companies is to move from symbolic alignment to performance linkage: driving executives and employees to deliver on climate commitments and rewarding them when they do.

As expectations evolve, boards should approach climate and sustainability priorities with the same discipline applied to other strategic imperatives and be prepared to link incentives to them to ensure real progress and accountability.

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