Linking Pay to Planet: How Executive Compensation Influences Carbon Assurance in UK Firms

In their recent research article, Stefan Simic, Le Luo, and Rina Datt provide intriguing insights into how compensation strategies within companies influence their decision to engage in carbon assurance. Published in September 2023, their study, titled „Compensation and carbon assurance: Evidence from the United Kingdom,“ explores a significant and timely topic given the growing urgency of climate change and the increasing focus on corporate sustainability.

The researchers used a comprehensive dataset comprising 1326 firm-year observations from the UK between 2010 and 2018. They discovered a compelling link between firms that incorporate corporate sustainability incentives in executive compensation and their likelihood of undertaking voluntary carbon assurance. This finding suggests that when executive compensation is tied to sustainability goals, there is a higher probability of firms committing to carbon assurance practices. The study also found that companies with higher director compensation and those embroiled in compensation controversies were more inclined towards carbon assurance.

An interesting aspect of the study is its exploration of the United Kingdom’s mandatory greenhouse gas emissions reporting mandate and its impact. The researchers found that this mandate, along with factors like industry specifics and the gender diversity of the board of directors, plays a significant moderating role in the relationship between compensation and carbon assurance. This insight is particularly valuable for investors, managers, and regulators who are striving to understand the factors driving the growing carbon assurance market.

The article delves into the broader context of changing stakeholder expectations amid the climate crisis. It highlights the shift in compensation practices in firms, linking non-financial targets to executive pay to encourage green investments. However, this shift also brings challenges, such as the temptation to engage in greenwashing – reporting skewed towards positive environmental performance to maximize compensation. The study argues that independent third-party carbon assurance is an effective tool to combat these issues, enhancing credibility and transparency.

Carbon assurance, as the research underscores, is a relatively new yet critical field, especially in the context of climate-related disclosure initiatives. It focuses on verifying the accuracy and reliability of reported carbon emissions and other climate-related data. This aspect is increasingly important for investor decision-making and has significant implications for firm value.

The uniqueness of the study lies in its systematic examination of the relationship between specific compensation factors (CSR-linked executive compensation, total director compensation, and compensation controversies) and carbon assurance. By shedding light on these dynamics, the research by Simic, Luo, and Datt makes a substantial contribution to our understanding of corporate behavior in the realm of sustainability and climate accountability.


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International Journal of Auditing