The US Securities and Exchange Commission is considering requiring publicly traded US companies to disclose climate-related risks. Republican state officials, buoyed by a recent Supreme Court ruling, are already threatening to sue, claiming regulators do not have authority.
While the debate heats up, what is surprisingly missing is the discussion about whether the disclosures actually affect corporate behavior.
An underlying premise of financial disclosure is that what is measured is more likely to be managed. But do corporations who disclose climate change information really reduce their carbon footprint?
I am a professor of economics and public policy, and my research shows that while carbon disclosure encourages some improvement, it is not enough to ensure that companies’ greenhouse gas emissions decline. Worse yet, some companies use it to disrupt and enable greenwashing – false or deceptive advertising that claims the company is more environmentally or socially responsible than it actually is.
I believe the SEC has an unprecedented opportunity to create a program that is greenwashing-resistant.
Disclosure doesn’t always mean less carbon
Although carbon disclosure is often held up as an indicator of corporate social responsibility, the data tells a more nuanced story.
I examined carbon disclosures made by nearly 600 companies that were listed on the S&P 500 index at least once between 2011 and 2016. The disclosures were made to CDP, formerly the Carbon Disclosure Project, a non-profit organization that surveys companies and governments about their carbon footprint. emissions and management. More than half of all S&P 500 firms respond to its requests for information.
At first glance, one might think that a mandatory, unified framework for reporting companies’ climate management and risk data and their greenhouse gas emissions, such as the one proposed by the SEC, is likely to underpin more efficient use of fossil fuels. emissions as the economy grows.
I found that companies that consistently disclosed their emissions to the CDP reduced their unitwide carbon emission intensity by at least one measure: per capita carbon emissions of full-time employees. This means that as the company grows in size, it is projected to reduce its carbon footprint on a per employee basis. However, this does not necessarily mean a reduction in the company’s overall carbon emissions. Most of the decline involved large emissions-intensive companies, such as utilities, trying to outdo the expected climate regulations.
Companies that received a “B” grade from the CDP increased their overall carbon emissions on average during that time. In particular, financial, health care and other consumer-oriented sectors that did not experience the same regulatory pressure as greenhouse gas-intensive firms led the growth.
About a quarter of the S&P 500 companies that completed the CDP’s annual climate change survey assessed their business impacts on the environment and integrated climate risk management into their business strategy. Yet unitwide emissions still increased.
Earlier research found similar results in the first decade of the US Department of Energy’s voluntary greenhouse gas registry. Overall, it was found that participation in the registry had no significant effect on the carbon emission intensity of companies, but many companies, being selective in what they reported, reported emissions reductions.
Another study, which focused on power sector participation in CDP surveys, showed an increase in carbon intensity.
The ‘A-List’ may not be exempt from greenwashing
Even the companies that made the CDP’s “A-List” of climate leaders the coveted “A-List” of climate leaders are not necessarily free from greenwashing.
A company earns an “A” grade when it meets criteria for disclosure, awareness, management and leadership, including the adoption of global best practices, such as science-based emissions targets, even though these practices result in improved environmental performance. convert or not.
Because the CDP grades companies based on sustainability outputs rather than results, an “A-list” company can be “carbon neutral” when it counts only the features it has, not its products. manufacturing factories. In addition, a company that has earned an “A” may commit to removing all emitted carbon but maintain partnerships with oil and gas companies to “generate new exploration opportunities.”
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Retail and apparel giants Walmart, Target and Nike — in the “B” to “A-minus” range in recent years — offer an example of the challenge.
They regularly disclose their carbon management plans and emissions to the CDP. But they are also part of the industry-led Sustainable Apparel Coalition, which has controversially featured petroleum-based synthetics as the most sustainable alternative over natural fibers in the Higgs index, a supply chain measurement tool used by some clothing companies. Tends to show a social and environmental footprint for consumers. Walmart has been sued by the Federal Trade Commission over products described as “eco-friendly and sustainable” with bamboo and rayon, a semi-synthetic fiber made using toxic chemicals.
Creating a Greenwashing-Resistant Disclosure Program
I see three key ways for the SEC to design a climate disclosure program that is greenwashing-resistant.
First, misinformation or disinformation about ESGs – environmental, social and governance factors – can be reduced if companies are given clear guidelines on what constitutes a low-carbon initiative.
Second, companies may be required to benchmark their emissions targets based on historical emissions, undergo independent audits, and report tangible changes.
It is important to clearly define the “carbon footprint” so these metrics are comparable across companies and over time. For example, there are different types of emissions: Scope 1 emissions are direct emissions from a firm’s chimney and tailpipes. Scope 2 emissions are linked to the electricity a company consumes. Scope 3 is hard to measure – it includes emissions across a company’s supply chain and through the use of its products, such as the gasoline used in cars. This shows the complexity of the modern supply chain.
Finally, companies may be asked to disclose a specific time frame for phasing out fossil fuel assets. This will better ensure that the pledges are translated into concrete actions in a timely and transparent manner.
Ultimately, investors and financial markets need accurate and verifiable information to assess the future risk of their investments and to determine whether net-zero pledges made by companies are reliable.
Now the momentum is on to hold companies around the world accountable for their emissions and climate pledges. Disclosure rules have been introduced in the United Kingdom, the European Union and New Zealand, and in Asian business centers such as Singapore and Hong Kong. When countries have similar policies that allow for consistency, comparability and validation, there will be less opportunities for loopholes and exploitation, and I believe our climate and economy will be better equipped for it.
