02: Introduction

Climate-linked executive remuneration is increasingly used to manage climate risk and support long-term value creation. Investors and boards view remuneration as a tool to align executive behaviour with climate strategies. However, challenges include balancing financial and climate priorities, selecting appropriate metrics, and addressing evolving regulatory and stakeholder expectations.

03: Key issues for investors & companies

Adoption of climate-linked incentives in Australia has grown significantly, with ASX200 companies increasing from 10% in FY20 to 54% in FY24. Drivers include regulatory developments, investor pressure, and rising commercial impacts of climate change.

Key challenges include aligning short-term incentives with long-term climate goals such as net zero by 2050. Short-term incentive (STI) frameworks often fail to capture long-term risks, while long-term incentives (LTI) typically vest within three to five years, limiting effectiveness.

Metric design is another issue. Effective metrics must be sector-specific, measurable and simple, yet many companies lack transparent, forward-looking emissions targets. Misalignment between climate and financial incentives can create conflicting priorities, particularly in emissions-intensive sectors. Weightings often undervalue climate risks, while duplication of incentives risks overpaying for the same outcomes.

Disclosure practices remain inconsistent. Many companies report performance retrospectively with limited detail, making it difficult for investors to assess ambition or effectiveness. Improved transparency on targets, performance assessment, and board discretion is needed.

04: Guiding principles for companies and investors

The report establishes six guiding principles divided into strategic and incentive alignment.

Strategic alignment requires remuneration to be linked to a credible climate transition strategy with science-based targets and integration into governance, capital allocation and reporting. Without this foundation, incentives are unlikely to drive meaningful outcomes.

Incentive alignment focuses on design and effectiveness. Incentives should directly support climate strategy outcomes, avoid contradictions, and align with time horizons. Metrics must be measurable, industry-relevant and outcome-focused, avoiding rewards for business-as-usual activities. Examples include emissions reductions, renewable capacity growth, or revenue from low-carbon products.

Weightings should reflect the materiality of climate risks. In practice, STI weightings range from 5–15% and LTI from 10–30%, with higher weightings in emissions-intensive sectors.

Transparency is critical. Best practice includes prospective disclosure of targets, detailed reporting of performance, and explanation of board discretion. Only a minority of companies currently meet high disclosure standards.

The report also introduces practical tools, including a company evaluation matrix and engagement framework. These support investors in assessing whether incentives are aligned with strategy, measurable, appropriately weighted, and transparently disclosed.

05: Looking forward

Climate-linked remuneration is expected to evolve as companies strengthen transition strategies. Future priorities include improved disclosure, broader coverage across senior leadership, and regular review of incentive structures.

Companies are likely to integrate Scope 3 emissions and align incentive timelines more closely with long-term climate targets, potentially through extended vesting periods. Continued collaboration between investors, boards and executives will be necessary to ensure remuneration frameworks support effective climate action and long-term value creation.