Will linking oil industry’s executive compensation with ESG targets actually work?

Synopsis: With growing pressure from media, the general public, and aggressive activist shareholders on several ESG issues such as climate change, environmental damage, and the link with their trajectory for emission cuts, the Oil & Gas industry has started to respond. In many of the cases, the link between ESG targets with executive compensation for the companies in this industry is becoming apparent, as boards have started responding to challenges with investor perception. While it is good to link the top management’s compensation with the progress on major ESG issues ( combination of reward and penalty should work), the equation is not that simple. There are challenges, a) unless there is an independent and fair set of targets, the companies may report good progress without really achieving much, b) the issue is, will this linking work as an incentive for the senior executives to indulge in greenwashing and misreporting on critical matters related to ESG, c) even if the companies report truthfully and set targets which are ambitious and also work hard to achieve them, the question is, will it be enough? d) will the senior executives take sub-optimal capital allocation decisions which are bad for the Return on Investments (RoIs) for the companies, e) overall, the returns on their investments that the shareholders can expect are linked to multiple factors but if the incentives for executives are misaligned, that will be detrimental for the company’s operating and financial performance.