More and more companies are recognizing that they, too, are important in the fight against climate change.

In the meantime, almost all large listed companies worldwide have set themselves ambitious climate targets for 2030 and beyond.

However, these self-commitments will only be hot air if shareholders and society do not ensure that companies live up to their commitments.

There is great skepticism about this on the financial markets.

In a recent Edelman survey of 700 global institutional investors, 79 percent of respondents expressed concern that companies will not meet their net-zero commitments to climate targets.

The reason: The implementation of the ambitious plans will not be easy, nor will it be quick.

Companies need to take bold and goal-oriented steps towards climate neutrality as soon as possible.

But many have not even marked the route.

Today's board members have to make the decisions on this, they have to sow the seeds - but by the time the harvest is harvested, most of them will have long since retired.

The truth is, current business leaders have little to no incentive to quickly take the actions needed to fulfill their commitments.

Part of that truth is that there is a very limited ability to hold them accountable when they do too little.

The investment community needs to use its power much more

There is a viable way to bridge this gap: companies need to break down their long-term commitments into short-term plans, and some of today's executive pay needs to be linked to progress during those stages!

One advantage is that the integration of climate targets into the remuneration of the board of directors requires a strategic discussion between the supervisory board and the management.

This is valuable for the company to determine the immediate priorities to reach the 1.5 degree target.

In addition, it leads companies to decarbonize and develop innovative technologies that make them part of the solution and create value for their shareholders.

This is also crucial to avoid so-called stranded assets.

Sustainability goals thus become an integral part of corporate strategy.

In most countries, investors or shareholders have a say in the issue of board remuneration.

They can vote on this at general meetings and, if the results are disappointing, they can influence the election of the supervisory board/board of directors.

The investment community needs to use this power much more.

“Say on Climate” votes cannot replace incentive systems

Allianz Global Investors and Cevian have publicly committed to this: remuneration systems without transparent and ambitious ESG performance indicators will be rejected at general meetings in the future.

AllianzGI and Cevian explicitly encourage other asset owners and asset managers to do the same.

Is this the perfect solution?

Certainly not.

With incentive systems, there is always a risk of undesirable behavior or outcomes.

In order to avoid these as much as possible, it is important to design the incentive systems correctly.

These must be closely aligned with the key sustainability factors and linked to the sustainability strategy.

In addition, the goals must be quantifiable, measurable and prospectively transparent, and they must not give the board any room for discretion.

In addition, ESG or climate targets should not be mixed up with other targets in a scorecard, as this increases the risk of greenwashing.

And companies must report transparently on progress and their contribution to remuneration.

So-called “Say on Climate” resolutions are a good addition to linking climate targets and Executive Board remuneration.

These are AGM votes on corporate climate strategy.

They give investors the opportunity to express themselves by voting on the credibility and level of ambition of the strategies.

However, "Say on Climate" votes cannot replace the incentive systems mentioned: These are consultative votes and they are currently only being held by a very small number of companies outside Germany.

And they do not resolve the conflict between the different time horizons of today's management teams and long-term climate goals.

Antje Stobbe

is Head of Stewardship at Allianz Global Investors.

Harlan Zimmerman

is a senior partner at Cevian Capital.