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.
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:
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.
Companies with a dedicated sustainability committee at board level are significantly more likely to include environmental targets in both short- and long-term CEO pay. Our research shows that having a board-level sustainability committee made it more than 2.4 times more likely that companies would embed environmental targets across both short- and long-term incentive plans.
Governance matters: when sustainability is embedded in board structures, it’s more likely to be embedded in compensation policies too. Board leadership and oversight are critical to moving from vision to execution.
Companies with net-zero targets or formal environmental plans are more likely to include climate-related goals in executive pay. Our analysis showed that firms with a net-zero target were around 1.5 times more likely to include climate-related criteria in CEO compensation, and those with formal environmental plans were also notably more likely to do so.
These companies were also more inclined to embed environmental goals into LTIPs, particularly those with net-zero targets. Public climate commitments can influence internal governance, suggesting credible intent to increase leaders’ environmental accountability in their mandate.
Despite the large number of companies that included environmental metrics in CEO compensation alone – over 40% in the sample – we cannot assume that climate goals are a meaningful driver of executive behavior. Ultimately, what mattered was not the presence of climate targets, but their financial relevance. On average, environmental metrics accounted for just 7.6% of total CEO pay.
Even in firms with net-zero commitments or formal sustainability plans, this figure rarely exceeded 10%. For most companies, climate action inevitably has limited influence on executive decision-making, especially when compared with the dominant financial metrics that heavily influence the variable aspects of executive compensation packages.
Executives are most likely to prioritize the targets that carry the greatest impact on their bonuses. When environmental goals represent only a modest share of pay, they become easier to overlook. This disconnect is particularly troubling in companies that have made bold climate pledges, such as net-zero emissions targets, yet fail to embed those priorities meaningfully into their CEO’s mandates.
To move from ambition to execution, companies must elevate the financial relevance of their climate goals in executive pay. Otherwise, they risk sending mixed signals: sustainability is important as a message, but not in the execution of a real strategy.
Our findings paint a clear picture: many companies are taking initial steps to link executive compensation to climate goals, but these don’t go far enough to make those links effective or deliver real change. Boards must step up.
Here are three steps that boards can take to design incentive structures that will translate climate ambition into action:
Boards should institutionalize climate governance by establishing or empowering sustainability committees that oversee climate strategy, risk, and executive accountability. These committees should play a direct role in shaping climate-linked compensation, ensuring it is not only included but integrated into the company’s performance management mindset.
Executive pay should be structured to support the firm’s material climate risks, sector-specific decarbonization priorities, and climate targets. Climate-related KPIs must be carefully selected to reflect what truly drives sustainable value creation, not buried in aggregated ESG scores that dilute focus. Boards should challenge whether pay structures are driving the right decisions for long-term resilience.
Boards should require the inclusion of climate-related targets in both annual bonuses and LTIPs – and make sure those targets matter. For LTIPs, this means assigning meaningful weight (e.g., at least 15% of total compensation) and tying rewards to specific, externally verified climate outcomes. These targets must be clearly linked to the company’s long-term climate strategy, not vague ESG references.
Boards must do more than acknowledge the challenge; they must shape the incentives that drive leadership behavior. Embedding climate targets into both short- and long-term pay, aligning incentives with strategic decarbonization priorities, and strengthening governance through dedicated sustainability oversight are business imperatives. By designing executive compensation systems that reflect what truly matters for long-term value creation, boards can turn climate commitments into credible, measurable outcomes.
Growing demand for building materials requires novel approaches to construction. Holcim CEO Miljan Gutovic shows how his company has adopted circularity as a new way to grow the business....
Brazil, India, and Nigeria, among others, present opportunities and challenges for business in a rapidly developing energy landscape. Companies should tailor their approaches to tap into growth markets....
Audio available
ASML CEO Christophe Fouquet on EUV innovation, AI-driven chip demand, and leading Europe’s most critical technology company....
Digital ecosystems are transforming how industries decarbonize. By linking data, AI, and shared infrastructure, companies can cut emissions, boost resilience, and tackle Scope 3 impacts—proving collaboration is key to achieving a low-carbon,...
Explore first person business intelligence from top minds curated for a global executive audience