Climate-Related Managerial Performance Incentives and Corporate Carbon Emissions Reduction Targets

Abstract

Institutional investors have increased calls for firms to address carbon emissions, leading more firms to disclose formal carbon emissions reduction targets. Extant research offers mixed evidence on carbon target effectiveness in ultimately attaining meaningful emissions reductions. While recent research has revealed new insights into outcomes associated with environmental performance incentives in executive compensation, we have yet a limited understanding of the relationship of climate-related incentives on firm-level emissions. This study draws on agency theory to articulate mechanisms by which climate-related management incentives drive corporate carbon emissions performance management. Using data on corporate carbon targets and climate-related executive incentives from CDP, we find that incentive programs are associated with more difficult firm-level carbon targets, but that meaningful progress toward firm-level carbon target attainment may require specific targeted incentive metrics, and executives may exploit more subjective incentive metrics to enhance compensation without directly reducing emissions.