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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, emboldened by a recent Supreme Court ruling, are already threatening to sue, claiming regulators don’t have the authority.
While the debate heats up, what’s surprisingly missing is a discussion about whether disclosures actually influence corporate behavior.
An underlying premise of financial disclosures is that what gets measured is more likely to be managed. But do corporations that disclose climate change information actually reduce their carbon footprints?
I’m a professor of economics and public policy, and my research shows that while carbon disclosure encourages some improvement, it is not enough by itself to ensure that companies’ greenhouse gas emissions fall. Worse still, some companies use it to obfuscate and enable greenwashing – false or misleading advertising claiming a company is more environmentally or socially responsible than it really is.
I believe the SEC has an unprecedented opportunity to design 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 investigated the carbon disclosures made by nearly 600 companies that were listed in the S P 500 index at least once between 2011 and 2016. The disclosures were made to CDP, formerly the Carbon Disclosure Project, a nonprofit organization that surveys companies and governments about their carbon 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 mandated, 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 lead to more efficient use of fossil fuels, lowering emissions as the economy grows.
I did find that companies that have proactively disclosed their emissions to CDP on average reduced their entitywide carbon emissions intensity by at least one measure: carbon emissions per capita of full-time employees. This means that as a company increases in size, it is estimated to reduce its carbon footprint on a per-employee basis. This does not, however, necessarily translate to a reduction in a company’s overall carbon emissions. Much of the decline involved large emissions-intensive companies, such as utilities, that were trying to get ahead of expected climate regulations.
Companies that received a “B” grade from CDP increased their entitywide carbon emissions on average over that time. Notably, those in the financial, health care and other consumer-oriented sectors that did not experience the same level of regulatory pressure as greenhouse gas-intensive firms led the increase.
About a quarter of the S P 500 companies that completed CDP’s annual climate change survey undertook assessments of their business impacts on the environment and integrated climate risk management into their business strategy. Yet entitywide emissions still increased.
Earlier research found similar results in the first decade of the U.S. Department of Energy’s Voluntary Greenhouse Gas Registry. Overall, it found that participating in the registry had no significant effect on the companies’ carbon emissions intensity, but that many of the companies, by being selective in what they reported, reported emissions reductions.
Another study, which focused on the power sector’s participation in CDP’s surveys, found an increase in carbon intensity.
‘A-List’ may not be exempt from greenwashing
Even companies that made CDP’s coveted “A-List” of climate leaders may not necessarily be free of greenwashing.
A company earns an “A” grade when it has met criteria of disclosure, awareness, management and leadership, including adopting global best practices, such as a science-based emissions target, regardless of whether these practices translate into improved environmental performance.
Because CDP grades companies based on sustainability outputs rather than outcomes, an “A-list” company could be “carbon neutral” when it counts only the facilities it owns and not the factories that make its products. Moreover, a company that has earned an “A” could commit to removing all emitted carbon but maintain partnerships with oil and gas companies to “generate new exploration opportunities”.
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