Two of the seven cross-industry metric categories stand out for their ability to reveal whether an entity walks the talk on climate: internal carbon pricing shows whether climate cost is embedded in investment decisions, and remuneration linkage shows whether management has personal financial stakes in climate outcomes.
Internal Carbon Pricing: Para 29(f)
An internal carbon price is a price that an entity places on its own GHG emissions for the purpose of decision-making. IFRS S2 Appendix A defines two types:
- Shadow price (notional): A hypothetical price applied in financial modelling and investment appraisal. If a new project is evaluated with an internal carbon price of 50 USD per tonne, projects with high emissions become less attractive compared to low-emission alternatives, even before any external carbon tax or cap-and-trade system is in force.
- Internal fee or tax: An actual monetary charge levied on business units for their emissions. The collected fees are often pooled into a climate fund used to finance renewable energy, efficiency improvements, or carbon removal projects. This creates real financial incentives at the operating level.
What IFRS S2 Requires (Para 29(f))
If an entity uses an internal carbon price:
- (i) Whether and how it applies a carbon price in decision-making: which decisions, which activities, which business units
- (ii) The price per metric tonne of GHG emissions
If an entity does not use an internal carbon price, it must disclose that fact. The absence of an internal carbon price is itself informative.
The Strategic Significance of Internal Carbon Pricing
The Basis for Conclusions (BC130) notes that internal carbon pricing is one of the most effective tools for embedding long-term climate risk into near-term business decisions. An entity with an internal carbon price of 100 USD per tCO2e is de facto preparing for a carbon-constrained future. It is selecting lower-carbon investments today because they become more economically attractive when carbon costs are internalised.
Example: A global chemicals company discloses:
"We apply an internal shadow carbon price of USD 80 per tonne CO2e (2024), rising to USD 150 per tonne by 2030. This price is applied to all capital investments above USD 5 million. In 2024, 14 projects passed an initial financial screen but were rejected or redesigned following the internal carbon price assessment, avoiding an estimated 280,000 tCO2e of annual emissions over a 15-year asset life. The carbon price is reviewed annually by the Chief Financial Officer and updated to reflect emerging regulatory carbon price trajectories."
An internal carbon price is like a company that prices externalities into its own decisions before regulators require it. It is the corporate equivalent of a household buying a fuel-efficient car not because fuel taxes force it, but because the household "charges itself" the true long-run cost of fuel. Companies with internal carbon prices are building transition risk resilience into their capital allocation, voluntarily, before external constraints force the adjustment.
Executive Remuneration: Para 29(g)
What IFRS S2 Requires
Para 29(g) requires two disclosures about the link between climate performance and executive pay:
- (i) Description: Whether and how climate-related considerations are factored into executive remuneration policies. This is a qualitative description: which climate metrics are used? How are they incorporated (as mandatory KPIs, as modifiers, as qualitative assessments)? Which executives are in scope?
- (ii) Percentage: The percentage of executive management remuneration that is linked to climate-related considerations.
Why This Metric Matters
Remuneration linkage is a governance signal of the highest order. Executive pay structures reveal what an organisation truly values. Consider the contrast:
- An entity that has a net-zero commitment but no remuneration linkage to emissions targets: management has no personal financial stake in delivery
- An entity that has 25% of long-term incentive awards linked to an emissions reduction target: management's wealth depends on climate performance
The percentage disclosure makes this concrete. An investor can compare 5% remuneration linkage at one company to 30% at another, drawing conclusions about relative management commitment.
Connection to Governance Disclosures
Para 29(g) directly connects to the governance disclosures in Para 6(a)(v), where entities describe how the governance body oversees target-setting and monitors progress, including whether remuneration is linked to climate metrics. The governance section describes the oversight structure; Para 29(g) provides the quantitative data.
| Remuneration Linkage Type | Description | Strength of Incentive |
|---|---|---|
| No linkage | Climate metrics not in any remuneration scheme | None |
| Qualitative modifier | Board can adjust pay downward if climate targets missed | Weak: discretionary and often small |
| Short-term incentive KPI | Annual bonus partially tied to a climate metric (for example, 5 to 10%) | Moderate: annual focus, may encourage short-termism |
| Long-term incentive condition | Vesting of multi-year share awards conditional on climate target (for example, 20 to 30%) | Strong: multi-year horizon, material financial stake |
Key Takeaways
- 1Two types of internal carbon price exist: shadow prices (hypothetical, used in investment appraisal) and internal fees (actual charges on business units that fund climate investments)
- 2If no internal carbon price is used, that fact must be disclosed - the absence of carbon pricing is itself material information for investors
- 3Executive remuneration linkage requires disclosure of whether and how climate is factored into pay, plus the percentage of executive compensation linked to climate metrics
- 4Long-term incentive conditions (20-30% vesting tied to emissions targets) are the strongest remuneration signal; qualitative modifiers are the weakest
- 5Para 29(g) connects directly to governance disclosures in Para 6(a)(v), creating a quantitative complement to the qualitative governance narrative about target oversight