Published September 17, 2026 in Sustainability • 9 min read • 
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In 2015, Mark Carney, the then Governor of the Bank of England, stood before an audience of insurance executives at Lloyd’s of London and gave a name to something that many in the room already felt but could not articulate precisely.
He called it the ‘tragedy of the horizon,’ the gap between the long horizon over which climate damages accumulate and the much shorter horizons over which corporate and financial decisions are made. Climate change imposes costs on future generations, Carney warned, and the current generation has no direct incentive to fix the problem.
The phrase stuck. A decade later, it appears in virtually every major climate-finance report. A dedicated website was created to commemorate its 10th anniversary. Policy documents invoke it routinely.
For all its prominence, the ‘tragedy of the horizon’ has never been formalized. Nobody has translated it into the precise language of the economic and financial theories that govern how firms make decisions. It remains a metaphor. Powerful, widely shared, but analytically empty. We wanted to understand the nature of the tragedy and, equally important, what it implies for the people who design corporate incentives.
What made the question more pressing was a sharpening real-world puzzle. Companies have been responding to climate pressure by tying executive pay to climate metrics. The practice has grown from roughly 3% of major firms in 2010 to over 30% by 2021. Net-zero pledges are everywhere.
The deep, long-horizon quality choices are systematically underinvested in because the contract that would fully reward them cannot credibly exist.
Yet when researchers examined what these pledges commit to, the picture is far less impressive: announced commitments imply roughly 40% emission reductions, not the 100% that ‘net-zero’ headlines suggest. Interim targets are sparse and weakly binding. Climate-linked pay has proliferated, but climate outcomes have not followed.
To understand why, we built a formal model, published in Economics Letters, and the answer turns out to be disarmingly simple. The model compares two settings: a hypothetical one in which the CEO’s compensation package can be tied to long-horizon climate outcomes, and a more realistic one where compensation cannot be tied because the contracting horizon is shorter than the climate payoff horizon.
The gap between the two captures how much climate investment is forgone because the contract cannot reach long-horizon outcomes. This is not because of shortsighted CEOs, or poor climate data, or even a lack of good intentions, but because the contract that would fully solve the tragedy cannot credibly exist.
To see why, it helps to think about a setting most people can relate to.
A developer commissions a large residential building. The general contractor oversees the project: the foundation, the structural frame, the mechanical systems, and the exterior. During construction, the developer can inspect progress through site visits, engineering reports, and milestone certifications. There are observable, verifiable signals of quality along the way. Based on these, the developer pays the contractor.
But the question that truly matters will not be answered for decades. Will the building’s foundation hold without cracking? Will the waterproofing systems keep the underground levels dry 30 years from now?
Will the structural choices made today, such as the grade of concrete, the quality of reinforcement, the care taken in places nobody can see once the walls close up, prove adequate when the building faces its first serious seismic event, its first major storm cycle, or its first round of deep structural aging?
The developer might think: I will write a contract that holds the contractor accountable for these long-run outcomes. I will set aside part of the fee, and in 25 years, if the building is structurally sound, the contractor will receive a substantial bonus. If there are failures, the contractor bears the cost.
In theory, this perfectly aligns incentives. The contractor, knowing that long-run quality will be rewarded, invests in the best materials and the most careful workmanship even in the places that are invisible during construction.
In practice, the contract is fiction. In 25 years, the developer may have sold the building. The new owners, a condominium association of dozens of residents who bought their apartments individually, have no relationship with the original contractor and no interest in honoring the developer’s escrow arrangement.
The contractor’s firm may have been restructured, acquired, or dissolved. The escrow agent may no longer exist. Courts have essentially no track record of enforcing payments contingent on construction quality across a quarter century.
And crucially, everyone knows all of this on the first day of construction. The contractor, understanding that the long-term bonus will never materialize, makes decisions based on what is observable and verifiable now: the interim inspections, for example, or the milestone certifications.
The result is that the building gets built and passes all interim inspections. It may even be a good building. But the deep, invisible, long-horizon quality choices, the ones whose consequences surface only decades later, are systematically underinvested in because the contract that would fully reward long-horizon quality cannot credibly exist. The promise unravels before it is made.
Even if structural engineering advances to the point where we could measure foundation quality with perfect precision 25 years after construction, this would not solve the problem. In reality, it would make it worse.
The more precisely we could measure long-run quality, the more valuable it would be to write a contract tied to that measurement, and the greater the loss from being unable to do so. A perfect test that nobody can contractually act on is wasted precision.
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The parallel to corporate climate investment is not a loose metaphor. It is structurally precise. The developer is the board of directors. The contractor is the CEO. The construction project is the portfolio of climate investments the CEO undertakes today: emission reductions, transition planning, clean technology deployment, and physical risk mitigation.
The interim inspections, site visits, engineering reports, and milestone certifications correspond to the climate metrics that can be measured and verified during the CEO’s tenure: emissions disclosures, ESG ratings, third-party sustainability audits, and progress against announced targets. The 25-year structural assessment corresponds to the tangible long-run climate outcome: whether the investments truly reduced the company’s exposure to transition costs, regulatory liabilities, and physical damages.
The condominium association that replaces the original developer is the future governance structure, which includes new boards and new shareholders. This new structure inherits the consequences of earlier decisions.
Advances in climate measurement do not close the gap when the CEO’s compensation contract cannot reach the assessment.
Its shareholders are investors who bought shares years after the CEO departed, who have no relationship with the executive who made the critical decisions, and who have little interest in defending arrangements made by a previous board.
The escrow arrangement that dissolves is the deferred compensation structure that, on paper, was supposed to tie the CEO’s pay to long-horizon outcomes but that, in practice, cannot survive the turnover of boards, shareholders, and governance regimes across generational time scales.
And just as better structural tests do not help when no contract can act on them, advances in climate measurement do not close the gap when the CEO’s compensation contract cannot reach the assessment. Better measurement helps only if the contract can use it.
We call this distance the ‘commitment gap,’’ the gap between the horizon that the firm’s compensation mechanisms can credibly reach and the horizon over which the relevant outcomes will materialize. Every firm has one. The commitment gap is a problem inside the firm, a friction between the board and its CEO that prevents sufficient climate investment, even when the shareholders themselves would benefit from it.
Closing this gap, however important, does not by itself address the broader challenge of climate change, which requires collective action and policy instruments beyond the scope of any single firm’s governance. But it is the part of the problem that boards can and should address directly, even if they cannot fix the gap entirely.
If the commitment gap is fundamentally about the distance between the contracting horizon and the payoff horizon, one natural response is to ask whether changes in ownership structure can help. Long-horizon investors, such as pension funds with multi-decade liabilities, sovereign wealth funds, or family offices with intergenerational mandates, have a natural interest in outcomes that extend beyond the typical CEO tenure.
Their presence on the shareholder register can support the credibility of deferred compensation arrangements and signal that long-horizon commitments will be honored. Empirical research on shareholder horizons and corporate investment is consistent with this logic. It shows that firms with shorter horizons and more transient ownership tend to invest less in long-term projects.
Ownership structure can help, but it cannot eliminate the commitment gap. The core difficulty is that the CEO will depart before the relevant outcomes materialize, and the institutional infrastructure for enforcing payments to departed executives across decades remains weak regardless of who holds the shares.
Long-horizon ownership narrows the gap but does not close it. The CEO’s limited tenure is the fundamental constraint; shareholder short-termism makes it worse, but removing shareholder short-termism does not remove the constraint itself.
This means that even firms with patient, long-horizon ownership should measure their commitment gap and recognize that compensation design has structural limits.
The commitment gap is a structural friction, not a design flaw. It exists independently of the many other forces that shape corporate climate decisions: signaling to stakeholders, regulatory compliance, reputational management, and collective action problems.
We do not claim that it is the only reason climate pledges outpace delivery, but it is a friction that persists on its own and understanding it changes how boards should evaluate their compensation packages. The commitment gap is a problem that boards can diagnose and factor into their governance and strategic decisions.
The question is not, ‘Have we tied CEO pay to climate metrics?’ Most large firms have. The question is whether the firm can credibly enforce the pay consequences over the time horizon that matters. Where the relevant climate outcomes are observable within the CEO’s tenure or vesting period, climate-linked pay can do its job. Where the outcomes that matter will not be visible for decades, the pay link will fall materially short of what boards may expect from it. Boards should assess this distance explicitly and take responsibility for the answer.
Vesting schedules, clawbacks, deferred bonuses, and performance-conditioned restricted stock are valuable tools. Each extends the contracting horizon. But there is a ceiling to what these mechanisms can collectively achieve. Where that ceiling falls short of the relevant payoff horizon, the next round of compensation redesign will not solve the problem. Boards should treat the residual gap as a constraint to be managed, not a failure to be fixed.
The tragedy of the horizon is the most prominent example of the commitment gap, but the mechanism is general. Any strategic initiative whose payoff horizon exceeds the CEO’s expected tenure faces the same friction: long-cycle R&D, infrastructure investments, institutional culture building, brand development. Wherever the time horizon of the strategy significantly exceeds the tenure of the leadership responsible for executing it, boards should ask whether the incentive structure supports the strategy or quietly undermines it.
This article is based on The tragedy of the horizon: a contracting account, published by the authors in Economic Letters, September 2026.
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