Climate Targets and Executive Pay: What AASB S2 Requires You to Disclose

AASB S2 includes a specific disclosure requirement that sits at the intersection of governance and metrics: whether and how executive remuneration incorporates climate-related considerations, and what percentage of remuneration is linked to climate performance.

For many Australian businesses, this is a relatively new concept — sustainability metrics in executive pay have been voluntary and relatively rare outside the largest ASX-listed companies. Mandatory disclosure changes the dynamics.

What AASB S2 requires

Under the metrics and targets pillar, AASB S2 requires entities to disclose:

• Whether climate-related considerations are included in executive remuneration policies
• The percentage of remuneration linked to climate-related considerations, where applicable
• The nature of the climate-related KPIs or metrics linked to remuneration

This is a disclosure requirement, not a prescription. AASB S2 does not require you to link remuneration to climate performance — but if you don’t, you must disclose that fact. If you do link remuneration, you must describe how.

The disclosure options

Option A: No climate link in remuneration. You disclose that climate-related considerations are not currently incorporated into executive remuneration. This is straightforward — but it signals to investors and stakeholders that climate performance is not personally incentivised at the executive level.

Option B: Qualitative link. Climate-related performance is a factor in performance assessments, but there is no specific quantitative metric or percentage allocation. You disclose the nature of how climate considerations factor into remuneration decisions.

Option C: Quantitative link. A specific percentage of short-term incentives (STI) or long-term incentives (LTI) is tied to measurable climate metrics — emissions reduction targets, energy efficiency improvements, a net zero milestone.

What best practice looks like

For entities seeking to demonstrate that climate is genuinely integrated into governance (not just reported on), the most credible approach is a quantitative link with:

• A specific climate metric (e.g., “Scope 1 and 2 emissions reduction of 10% against FY2024 baseline”)
• A defined weighting (e.g., “15% of STI is linked to climate performance metrics”)
• A clear assessment methodology (how performance against the metric is measured and who verifies it)
• Consistency between the remuneration climate metric and the climate targets disclosed elsewhere in the report

Inconsistency between the remuneration metrics and the reported climate targets is a common issue — boards set a net zero target, but the STI metric is a short-term energy intensity measure that isn’t directly connected. AASB S2 doesn’t require consistency, but assurance providers and investors will notice the disconnect.

Common pitfalls

Boilerplate disclosure. “The board considers climate performance as part of the holistic assessment of executive performance” without any specifics is unlikely to satisfy the disclosure requirement as assurance matures. It’s not measurable and can’t be independently verified.

Climate metrics that aren’t climate-related. Some remuneration packages include “sustainability” metrics that measure social or governance factors unrelated to climate (diversity, safety, community engagement). These are valuable but don’t satisfy the specific AASB S2 disclosure on climate-related considerations.

Percentage inconsistencies. If the remuneration report in the financial statements shows different percentages or different metrics than the AASB S2 disclosure, this creates a consistency issue that assurance providers will flag.

For boards reviewing remuneration frameworks

If your board is revising remuneration frameworks in light of AASB S2, consider:

1. Tying at least some short-term incentive to measurable climate metrics — even a small percentage (5–10%) signals board-level accountability
2. Choosing metrics that are within management control — absolute emissions are partially subject to business growth; intensity metrics or specific project outcomes may be more appropriate
3. Ensuring the metric is verified — ideally by the same data that goes into the AASB S2 report, creating consistency
4. Documenting the connection — the remuneration committee report should reference the same metrics as the climate statement

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