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Remuneration
of the FTSE 100 have linked remuneration to climate targets. Top performers have linked up to 30% of reward to climate targets, bottom performers are linking <5%
Organisations have the opportunity to lay the foundation for a more sustainable economy and society, as they look to accelerate change and meet their net zero commitments. Yet the scale of change will not be distributed evenly across the FTSE 100. Those generating the lion’s share of emissions, such as oil and gas companies, will need to rely on wider transformation and technological advancements to enable their transition to net zero. That said, there are a wide range of sector-agnostic initiatives which businesses should introduce to help embed decarbonisation into day-to-day operations.
97 of the FTSE 100 have started their journey to net zero
97 of the FTSE 100 have started their journey to net zero, as of October 2023. However, the gap between the top and bottom performers is vast. There is a clear opportunity for many to be doing more, through introducing key initiatives to move beyond good intentions and into tangible results.
At PwC UK, we’ve delved into publicly available information, such as annual reports, sustainability specific reports and other publicly available data sets from across the FTSE 100 to identify which initiatives are most widely used and their overall success. In doing so, we have pinpointed five key drivers of change that can trigger a mindset shift and unlock progress. Ranging from relatively easy-wins, through to more complex actions, we’ve identified how those leading the way to net zero have successfully implemented change and what companies beyond the FTSE 100 can learn from this.
Progress starts from within
Since introducing a strong governance structure does not require significant financial investment, it is often the first step to embedding net zero transformation within day-to-day operations, with 95 of the FTSE 100 already completing this. It is imperative to continue a strong internal governance to ensure maximum effectiveness to achieve targets.
Net zero success requires your sustainability strategy and business strategy to become one. Sustainability goals must become part of your definition of success. It is also vital the people across your organisation know what success looks like, understand the sustainability commitments you’ve made and their role in delivering them. Our analysis revealed 85 of the FTSE 100 have now linked remuneration to climate targets, as organisations seek to use accountability as a driving force.
However, the weighting varies hugely across the FTSE 100. Top performers have linked up to 30% of reward to climate targets, yet others fall well short of this, linking <5%.
We would encourage all organisations to view their stakeholders and workforce as a powerful lever. Remuneration needs to be weighted in line with other key metrics and deliverables, with payouts linked to net zero targets. In making a larger group of stakeholders accountable for targets, beyond the CEO and CSO, net zero strategies will be implemented with increased efficiency.
Targets and planning
“Like it or not, the world is no longer interested only in commitments or targets. There has to be a strong focus on delivery, with organisations demonstrating tangible progress and long-term transition towards a low-carbon economy.”
Joe Franses
Vice President of Sustainability, Coca-Cola Europacific Partners
Given our window of opportunity to limit climate change to 1.5°C requires action at pace, validated plans should be underway, particularly when it comes to near term targets. Science based target initiatives (SBTi) are the best-practice net zero targets that are validated by climate science. 53 of the FTSE 100 have a committed and validated near term SBTi target, whereas another 17 have committed targets pending validation. This leaves 30 companies with no near term SBTi targets. Those without not only risk scrutiny on their commitments to our planet, but are also more likely to see increased risks around cost of capital, threats to tenures and contracts.
Setting targets alone is not enough; companies must deliver on their commitments. We found 37 of the FTSE 100 have reduced emissions but not by enough to remain on-track, and a disappointing 4 saw an increase in absolute emissions. There is a gap between intention and action.
It’s also vital companies set and validate their long term net zero target, so that sustainability becomes embedded into the wider business strategy. Only 40 have validated long-term net zero targets, whereas others have set ambitious targets of achieving net zero much earlier than 2050. There is a clear gulf between those striving for success, and those settling for marginal progress. In order to reach these validated targets, 60 of the FTSE 100 have clear action plans with specific initiatives that are linked to their wider business strategy. However, only 28 of those have clear action plans on the budget and resource needed to make their net zero ambitions a reality.
It’s imperative businesses get target setting right. We consider having carbon reduction targets verified by SBTi as the gold standard that too few companies currently comply with. Shareholders are unlikely to tolerate slower business growth as a price worth paying to achieve carbon targets, but growing investor scrutiny will likely result in lacking, or missed, targets adversely affecting investment decisions. Therefore, businesses will need to find the sweet spot where they can do both.
Using initiatives
- Supply chain sustainability
- R&D
- Carbon pricing
Supply chain sustainability
Businesses must think beyond their own emissions, and also drive change across their supply chains. Collaboration is essential to accelerate progress. By introducing climate-related requirements into supplier contracts, those at the top of the supply chain will drive a self-awareness, forcing suppliers to consider and improve their own carbon footprint. Currently, 53 of the FTSE 100 have introduced such requirements, there is a clear opportunity for the remaining 47 to do similar. We encourage all organisations to have that conversation with suppliers, align on principles and demand not just SBTi- aligned commitments, but also action.
R&D
Whether a company is truly prioritising and investing in its net zero transition can also be demonstrated by setting green revenue or low-carbon R&D targets. For example, energy companies can set a target for the percentage of revenue coming from renewables. Such targets give stakeholders another metric to benchmark leadership teams against, and encourages the business to rethink its strategy and how it can pursue more sustainable business growth. Promisingly, 51 of the FTSE 100 have set green revenue (13), R&D (24) targets, or both (12), but an opportunity remains for the other 49 to do so.
Carbon pricing
Introducing an internal carbon price is another crucial step for businesses keen to embed carbon reduction into operational decisions. Too often carbon-intensive investment decisions are made that might have been avoided if the investment committee understood the environmental implications. While 18 of the FTSE 100 use internal carbon pricing to inform investment decisions, a further 25 have it but do not use it as part of an investment assessment, and the remaining 57 do not use internal carbon pricing at all. Carbon pricing is a powerful tool to make the financial case for investment in carbon reduction projects. As the sustainability agenda grows more important in the minds of investors, companies that either do not have or are not utilising internal carbon pricing will be at a significant disadvantage.
Data and reporting as an enabler of change
Recent years have seen a significant step change in the level of data companies must report on. With the Corporate Sustainability Reporting Directive (CSRD), EU Taxonomy and Task Force on Climate Related Financial Disclosures (TCFD) all coming into effect, the level of data required is at an all time high. This amount of data presents an opportunity to effectively track emissions with accuracy, and most importantly, identify areas of improvement. Our research found 85 of the FTSE 100 report scope 3 emissions for multiple years but concerningly, only 58 report all materially significant scope 3 categories for their industry. This significantly limits the effectiveness of reporting, stunting opportunities for change.
“Technology and good data management should be used as enablers of change, reducing the burden on teams and freeing them up to do the strategic thinking and problem-solving that can only come from the truly agile human mind.”
Chris Temple
Net Zero Transformation Leader, PwC UK
Building on success
Most of the FTSE 100 have started their journey towards net zero, with the vast majority hitting the easy quick-wins of internal processes, governance and reporting mechanisms. But it’s clear significant gaps exist and they could be doing more. Clear actionable initiatives and data collection need to be prioritised in the coming years.
More promisingly, in fronting the charge for change, the FTSE 100 have carved a path rich with learnings and insights, showing us the quickest, most effective route to decarbonisation. Organisations beyond the FTSE 100 must now use this to accelerate their own journey to net zero.
Questions for business leaders to consider
- For the CEO
- For the CSO
- For the CFO
- For the CTO and CIO
- For the COO
For the CEO
- Do you have a solid understanding of how decarbonisation and climate risk and resilience will impact your organisation’s growth, innovation and operational objectives and are these factors embedded in your core strategy?
- Do you have a clear view of how to balance growth and decarbonisation and what the commercial strategy required to deliver this is?
- How are you ensuring that your organisation - from your leadership team downwards - is delivering on its net zero commitments and to what extent is remuneration part of your strategy?
- Have you considered how decarbonisation will impact your products and services? Are there new products and services which could be introduced to drive growth while decarbonising?
For the CSO
- What are your decarbonisation targets and are they SBTi validated?
- Are your plans to achieve your targets delivering, or is there a gap between ambition and action that you need to overcome? How are you tracking progress against all of your various initiatives?
- How are you articulating, and socialising your targets and plans to the wider business? How are you linking in with other functions?
For the CFO
- How are you ensuring that you have the information and insights you need to inform sustainability-related decision-making? Do you have a full understanding of the financial impact of decarbonisation on your organisation, and the cost of inaction?
- Do you have confidence in your company’s ability to produce assurance-ready sustainability disclosures?
- Are you clear on how your decarbonisation strategy is contributing to creating value for your organisation?
For the CTO and CIO
- Are you confident that you have the data, technology and systems needed to make informed decisions about decarbonisation targets and progress?
- Do you have confidence in your organisation’s ability to produce assurance-ready sustainability disclosures?
- Do you have the data and information you need to report on all materially significant scope 3 emissions for your organisation?
For the COO
- Have you introduced internal carbon pricing to embed carbon reduction in your operational decisions?
- Have you considered green revenue or low-carbon R&D targets?
- Have you baselined your scope 3 emissions? Do you know which suppliers are having the most impact on your scope 3 emissions? Do your procurement policies include emissions based clauses?
Methodology
Between June 2022 and July 2023 we analysed publicly available information from across the FTSE 100 to identify which decarbonisation initiatives are most widely used and their overall success. From our research, we identified 14 key actions across five areas that we believe can drive real progress. Thanks to Dalia Serafy, Manager, PwC UK, for her contribution to this analysis.
