ABSTRACT This study examines whether ESG‐linked executive compensation is associated with carbon‐performance outcomes in carbon‐intensive industries. Drawing on stakeholder–agency theory, managerial power theory and signalling theory, the study develops a conditional governance argument that ESG‐linked pay is more strongly associated with carbon outcomes when supported by credible sustainability oversight. Using Bloomberg ESG Data and Worldscope financial data, the study analyses 3287 listed firms and 34,218 firm‐year observations over 2013–2025. The analysis examines carbon performance, carbon productivity and annual carbon‐performance change. The results show that ESG‐linked executive compensation is positively associated with all three carbon‐performance outcomes. Environmental performance is more consistently related to carbon outcomes than broader ESG performance, indicating the importance of distinguishing carbon‐specific performance from composite ESG measures. The findings also show that the association between ESG‐linked compensation and carbon‐performance outcomes is more pronounced in firms with sustainability committees, suggesting that board‐level oversight is linked to the credibility and implementation of ESG‐related incentives. Additional analyses indicate that ESG‐linked compensation is more likely to be adopted by firms with stronger sustainability governance, broader emissions disclosure and larger organisational scale. The findings suggest that ESG‐linked compensation is neither automatically substantive nor purely symbolic; rather, its association with carbon performance depends on the governance system in which it is embedded.
Aso Abdullah (Thu,) studied this question.