Many of Canada’s largest extractive companies have set ambitious environmental goals with long-term horizons (e.g., 2040 or 2050 net zero goals). One tangible way for companies to incentivize progress and demonstrate commitment to their environmental goals is by tying executive pay to specific climate metrics. This is becoming an increasingly common practice for Canadian companies, with 23% of TSX60 companies incorporating environmental metric/s into compensation. This article provides case studies of how 3 organizations that have each made 2050 net zero commitments,, incorporate environmental measures into their incentive programs using the following target-setting approaches:
- Absolute target (e.g., discrete numerical target set each year)
- Relative year-over-year target (e.g., target range relative to previous year’s results)
- Target positioning relative to peers (e.g., target ranking relative to peers)
Cenovus Energy – Absolute Target
Cenovus Energy (market cap: $29B) develops, produces, and markets crude oil, natural gas liquids, and natural gas internationally. Following its net zero 2050 commitment, the company has begun to incorporate this into its short-term incentive program (“STIP”) through an annual oil sands emissions intensity target with a 2.5% weight in the company’s 2020 corporate scorecard. Cenvous uses an absolute target-setting approach for this metric, which involves choosing a discrete emissions intensity target (e.g., 54.81 CO2e/BOE in 2020), and comparing it to actual results at year end. In 2020, Cenovus reported results of 52.01 CO2e/BOE, resulting in a multiplier of 1.6x on this metric.
Canadian Natural Resources Ltd. (“CNRL”) – Relative Year-Over-Year Target
CNRL (market cap: $62B) acquires, explores for, develops, produces, markets, and sells crude oil, natural gas, and natural gas liquids (NGLs). CNRL has incorporated two environmental metrics, GHG emissions intensity and number of pipeline leaks, into its corporate scorecard. While the individual weightings of these metrics are not disclosed, they are two of four metrics included in the Company’s “Safety, Asset Integrity and Environmental” category, which has a 10% weight overall. CNRL’s target-setting approach for these metrics involves setting targeted reduction ranges relative to the previous year’s results, with a threshold/maximum score of -/+10% (i.e., 2020 target was 0.046-0.056 tonnes/BOE, which is +/-10% of the 2019 actual result of 0.051). In 2020, the Company performed within the targeted range on these environmental metrics.
Barrick Gold – Target Positioning Relative to Peers
Barrick Gold Corporation (market cap: $43B) engages in the exploration, mine development, production, and sale of gold and copper properties. In 2020, the Company introduced a Sustainability scorecard into its long-term incentive program (“LTIP”). This scorecard has a 25% weight in the performance share units (“PSUs”), and measures performance on 18 quantitative and qualitative ESG metrics (7 of which are environmental) ranked relative to peers where applicable., Barrick’s target range is +/-10% of the previous year’s relative score, with a floor and ceiling of a “Grade A” and “Grade C” relative to peers (defined by sum of positioning on each metric). In 2020, the Company was scored in the top two quintiles of peers on all environmental metrics but one.
These are just some of the approaches to setting performance targets for an incentive plan metric. In selecting an approach specifically for an environmental metric, companies will need to consider where they are in their sustainability journey, the performance metric of choice’s alignment with strategy, and the availability of data among other factors. Regardless of which target-setting approach a company chooses, the key determinants to successfully including an environmental metric into the compensation program will depend on the metric’s ability drive towards the desired long-term objective, the calibration and rigor of the target levels, and the ability to clearly communicate this linkage internally to executives and externally to stakeholders.
 Hugessen Consulting: “Emerging Trends in Executive Compensation and ESG Webinar”
 Barrick Gold: “Barrick Updates Its Evolving Emissions Reduction Target”
 Reuters: “Canadian Natural sets new emission goals after profit beat”
 Cenovus Energy: “Cenovus sets bold sustainability targets”
 Barrick Gold: “Barrick Sustainability Report 2020”
 For indicators based on internal priorities, Barrick evaluates “performance, progress and expectations rather than trying to force equivalence with peer programs”.
 Barrick bases its assessment on Sustainability Reports, GRI content indexes and associated data tables, and other publicly available information to determine its relative positioning.