The U.S. Securities and Exchange Commission is considering requiring publicly traded U.S. companies to disclose the climate-related risks they face. Republican state officials, encouraged by a recent Supreme Court decisionAre is already threatening a lawsuitclaiming that regulators do not have the authority.
While the debate is heating up, there is a surprising lack of discussion about whether disclosures actually influence corporate behavior.
An underlying premise of financial disclosure is that what is measured is likely to be managed. But do companies that release information about climate change actually reduce their carbon footprint?
I’m a professor of economics and public policy, and my research shows that while carbon disclosure does promote some improvement, not enough in itself to ensure that greenhouse gas emissions from companies decrease. Worse, some companies use it to obfuscate and enable greenwashing – False or misleading advertising claiming that a company is more environmentally or socially responsible than it actually is.
I believe the SEC has an unprecedented opportunity to design a program that is resistant to greenwashing.
Disclosure does not always mean less carbon
although carbon disclosure is often cited as an indicator of corporate social responsibility, the data tells a more nuanced story.
I examined the carbon disclosures of nearly 600 companies that were included in the S&P 500 index at least once between 2011 and 2016. Communications have been made to CDP, formerly the Carbon Disclosure Project, a non-profit organization that surveys companies and governments about their carbon emissions and management. More than half of all S&P 500 companies respond to his requests for information.
At first glance, you might think that a mandatory, uniform framework for reporting companies’ climate management and risk data and their greenhouse gas emissions, such as that of proposed by the SECwill likely lead to more efficient use of fossil fuels, reducing emissions as the economy grows.
I did find that, on average, companies that proactively disclosed their emissions to CDP reduced the intensity of their carbon emissions across the entity by at least one metric: CO2 emissions per capita of full-time employees. This means that as a company grows, it is estimated that its carbon footprint per employee will decrease. However, this does not necessarily translate into a reduction in a company’s overall CO2 emissions. Large emissions-intensive companies were involved in much of the decline. such as utilitieswho tried to get ahead of expected climate regulations.
Companies that have a “B” class from CDP have increased their carbon emissions across the entity average over that time. In particular, financial, healthcare and other consumer-facing sectors, which did not face the same level of regulatory burden as greenhouse gas-intensive businesses, led the increase.
About a quarter of S&P 500 companies completed the IPO CDP’s annual climate change survey conducted assessments of their business impact on the environment and integrated climate risk management into their business strategy. Yet emissions have still increased across the entity.
Previous research has produced similar results in the first decade of the U.S. Department of Energy’s Voluntary Greenhouse Gas Registry. Overall, it appeared that participation in the register had taken place no significant effect on the CO2 emissions intensity of the companies, but that many of the companies, by being selective in what they reported, reported emission reductions.
Another study, which focused on the participation of the energy sector found an increase in carbon intensity in CDP’s studies.
‘A-List’ may not be exempt from greenwashing
Even companies that made CDPs were highly coveted”A list‘ of climate leaders is not necessarily free from greenwashing.
A company gets an ‘A’ grade if it does this has met the criteria of disclosure, awareness, management and leadership, including the adoption of global best practiceslike a science-based emissions targetregardless of whether these practices translate into improved environmental performance.
Because CDP rates companies based on sustainability outputs rather than results, an A-list company could be “carbon neutral” if it only counts the facilities it owns and not the factories that make its products. Additionally, a company that earned an ‘A’ could commit to removing all carbon emitted but maintain partnerships with oil and gas companies to ‘generate new exploration opportunities”.
Retail and apparel giants Walmart, Target and Nike – all in the “B” to “A-minus” range in recent years – provide an example of the challenge.
They regularly disclose their carbon management plans and emissions to CDP. But they are also part of the industry-led companies Coalition for Sustainable Clothingwhich one has controversial portrayed petroleum-based synthetics as the most sustainable choice over natural fibers in the Higgs index, a supply chain measurement tool that some apparel companies use to demonstrate social and environmental footprints to consumers. Walmart has been indicted By the Federal Trade Commission about products described as bamboo and ‘eco-friendly and sustainable’ that are made from rayon, a semi-synthetic fiber made using toxic chemicals.
Designing a greenwashing-resistant disclosure program
I see three main ways to do this the second to design a climate disclosure program that is resistant to greenwashing.
Firstly, misinformation or misinformation about ESG – environmental, social and governance factors – can be minimized if companies are given clear guidance on what a low-carbon initiative entails.
Second, companies could be required to benchmark their emissions targets based on historical emissions, undergo independent audits and report concrete changes.
It is important to clearly define the “carbon footprint” so that these figures are comparable between companies and over time. There are, for example different types of emissions: Scope 1 emissions are the direct emissions that come from a company’s smokestacks and tailpipes. Scope 2 emissions are related to the electricity a company uses. Scope 3 is more difficult to measure – it includes emissions in a company’s supply chain and from the use of its products, such as petrol used in cars. It reflects the complexity of the modern supply chain.
Finally, companies could be asked to make information public fixed deadline for phasing out fossil fuels. This will better ensure that commitments 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 determine for themselves whether this is the case net zero commitments made by companies are credible.
There is now global momentum to hold companies accountable for their emissions and climate commitments. Disclosure rules have been introduced in the United Kingdom, European Union And New Zealandand in Asian business centers such as Singapore And Hong-Kong. When countries have similar ones policyIf we enable consistency, comparability and verifiability, there will be fewer opportunities for loopholes and exploitation, and I believe our climate and economy will be better for it.