Redesign pay incentives to turn climate promises into action
The energy transition is accelerating, not slowing, nurtured by a convergence of regulatory demands, business risks, and strategic imperatives. In their fiduciary role to ensure the long-term sustainability of the companies they serve, board members have a responsibility to respond by ensuring executives are accountable for turning climate ambition into reality.
First, regulatory pressure is intensifying across major economies. In the European Union, the Corporate Sustainability Reporting Directive (CSRD) – even in its revised scope – sets a new standard for environmental transparency. Companies are expected to show not only climate pledges but also the coherence of their targets, transition roadmaps, and actual performance. This marks a shift from symbolic climate pledges to accountability for credible climate action. The impact won’t be limited to European firms. Non-EU companies with global supply chains, investor exposure, or European clients will come under pressure to meet similar standards. To remain competitive and credible in international markets, they must match this level of transparency or risk being left behind.
Second, climate risk is no longer hypothetical but a material, measurable business risk. Companies face mounting physical risks, including extreme weather events, resource scarcity, and supply chain disruptions, all of which can impair operations and asset value. Transition risks are reshaping market dynamics. Increasing carbon pricing and policy shifts affect access to financial capital. Trends in environmentally friendly consumption are also changing the market. For many sectors, the cost of inaction is already visible in increased insurance costs, stranded assets, or negative investor signals.
Third, navigating the low-carbon transition requires long-term strategic leadership. Transitioning to low-carbon business models, adopting clean technologies, and investing in climate resilience demand bold decisions today. This means going beyond decarbonization to reposition companies for sustainable growth in a rapidly changing world. Long-term resilience will depend on how effectively businesses embrace this shift – and whether boards are prepared to lead it.
The question is no longer whether boards should act, but how they can use their influence to translate businesses’ climate ambitions into long-term credible action. One of the most powerful levers at their disposal is executive compensation. By tying leaders’ pay directly to the achievement of meaningful climate milestones, a company’s climate strategy will not just be well-designed but also effectively executed through leadership accountability.
Linking executive pay to environmental goals is already underway, but it has not gone far enough. Recent evidence from Italian listed companies shows that, while many firms have started linking CEO compensation to climate targets, this is often done in a superficial way or with limited financial weight. Encouraging signs are emerging – but they are not yet sufficient to drive the scale of climate action required. Boards have a critical opportunity to design stronger, more aligned incentives with ambition to put climate accountability at the core of corporate leadership.
What our research reveals about compensation
We examined the practices of Italy’s major listed firms to understand how seriously companies are aligning climate goals with leadership accountability. Our study reviewed 220 companies in the FTSE All-Share Index, representing 95% of Italy’s national market capitalization. We assessed the extent to which firms publicly committed to environmental goals, such as pledging net-zero emission targets or issuing environmental performance plans, also reflected these commitments in CEO compensation structures.
We asked whether business leaders were incentivized to deliver on their company’s climate ambitions. Here’s what we found, and what it means for boards:
1. Climate-linked pay is becoming more common, but remains focused on short-term goals
About 44% of the companies we studied included environmental targets in CEO compensation. This was more common when we looked at annual bonuses (35%), and less so in long-term incentive plans (LTIPs) at 30%. Critically, only 20% of companies included environmental targets in both annual and long-term incentives – highlighting that climate-linked compensation lacks a balanced approach to incentivizing leadership accountability.
While we observed a spread in practice, the emphasis remained on short-term rewards, combined with limited integration into long-term pay structures. This undermines the potential of executive incentives to drive sustained climate accountability. Annual targets may encourage marginal improvements but often fail to drive meaningful transformation.