Compensation Incentives and the Effect of Chief Sustainability Officers

Companies appoint Chief Sustainability Officers (CSOs) to advance their Environmental, Social, and Governance (ESG) agendas. For most companies, CSOs are part of the broader executive team, but it is becoming more common for CSOs to be included amongst companies’ top management team, suggesting they have an influential role in the company. The paper presented in this Decarbonization Seminar investigates how this choice is related to company sustainability and financial performance and how CSO incentives moderate these relations. The authors find that, relative to having a CSO that is not on the top management team, having a CSO on the top management team is associated with higher sustainability performance, but with lower financial performance. This association is the strongest when the CSO has ESG metrics in his/her compensation contract. The composition of CSO compensation also matters; CSOs on the top management team who have a higher proportion of compensation paid as salary are associated with the greatest subsequent improvements in sustainability performance.