With executive pay set to remain a hot topic in 2017, attention is increasingly turning to the role that remuneration can play in cooling the climate. The Task Force on Climate-related Financial Disclosures – led by Bank of England Governor Mark Carney in his role as head of the Financial Stability Board – has called on energy companies to link compensation to climate risk. The recommendations suggest that remuneration policies should reflect how stricter environmental laws, extreme weather events and efforts to curb demand for fossil fuels could take their toll.
To successfully limit temperature rises to well below 2°C in line with the Paris Agreement, oil majors will need to wind-down exploration and production of hydrocarbons. Capital could then be reallocated within the companies to develop low carbon products and services, or returned to shareholders through increased dividend payments and share buy-backs. The transition will require far-sighted executive vision, which risks being obscured by reward packages that incentivise short-term thinking and ‘business as usual’. Investors are wise to ensure that reward packages are linked to a managed transition to a low carbon business model.
Ultimately though it is strategy, not incentives, which will drive change. Incentive structures follow from and aid the delivery of strategy, reinforcing key priorities and objectives. The decision to wind down high carbon operations cannot be executed by the remuneration committee, nor the choice to make large investments in low carbon assets. These are the decisions that will be vital in determining the resilience of oil companies in a