A Shell employee walks past the company’s new Quest Carbon Capture and Storage (CCS) facility in Fort Saskatchewan, Alberta, Canada, October 7, 2021.
Todd Korol | Reuters
As energy sector demand roars back and commodities market pundits talk about the return of $100 oil, there are new factors in the energy sector pushing producers to extract less — from greater fiscal discipline in the U.S. shale after a decade-long bust to ESG pressure and the ways in which energy executives are being paid by shareholders.
In 2018, Royal Dutch Shell became the first oil major to link ESG to executive pay, earmarking 10% of long-term incentive plans (LTIP) to reducing carbon emissions. BP followed suit, using ESG measures in both its annual bonus and its LTIP. While the European majors were first, Chevron and Marathon Oil are among the U.S. -based oil companies that have added greenhouse gas emissions targets to executive compensation plans.
The oil and gas companies are joining dozens of public corporations across all sectors — including Apple, Clorox, PepsiCo and Starbucks — that tie ESG to executive pay. Last week, industrial Caterpillar created the position of chief sustainability & strategy officer last and said it will now tie a portion of executive compensation to ESG.
As of last year, 51% of S&P 500 companies used some form of ESG metrics in their executive compensation plans, according to a report from Willis Towers Watson. Half of companies include ESG in annual bonus or incentive plans, while only 4% use it in long-term incentive plans (LTIP). A similar report from PricewaterhouseCoopers (PwC) found that 45% of FTSE 100 firms had an ESG target in the annual bonus, LTIP or both.
“We will continue to see the percentage of companies [linking ESG to pay] increase,” said Ken Kuk, senior director of talent and rewards at Willis Towers Watson. And although right now more than 95% of instances of ESG metrics are in annual bonuses, “there is a shift more toward long-term incentives,” he said.
A related survey by the firm last year, of board members and senior executives, revealed that nearly four in five respondents (78%) are planning to change how they use ESG with their executive incentive plans over the next three years. This reflects the current purpose-over-profit debate in the corporate world, with the environment ranking as the top priority.
In 2020, petroleum accounted for about a third of U.S. energy consumption, but was the source of 45% of the total energy-related CO2 emissions, according to the U.S. Energy Information Administration. Natural gas also provided about a third of the nation’s energy and produced 36% of CO2 emissions. Oil and gas companies have largely abandoned coal, which accounted for about 10% of energy use and accounted for nearly 19% of emissions.
Investors are increasingly focused on ESG, and more have been pressuring the fossil fuel industry to shrink its global carbon footprint and the associated risks to operations and bottom lines. “The increase in momentum that the investment community has put around ESG is driving the discussion into climate [change],” said Phillippa O’Connor, a London-based partner at PwC and a specialist in executive pay. “We can’t underestimate the impact that investors will continue to have for the next couple of years.”
Investor input played a decisive role in Shell’s seminal decision, as well as those at competitors that followed suit. And while executive compensation wasn’t high on the docket at Exxon Mobil’s shareholder meeting last spring, the industry was gobsmacked when the climate-activist hedge fund Engine No. 1 won three seats on its board of directors. The coup, as it was roundly described, may ultimately deemphasize Exxon’s reliance on carbon-based businesses and move it more toward investments in solar, wind and other renewable energy…