Insight: The SEC’s climate disclosure plan may be in trouble after a recent Supreme Court ruling, but a bigger question looms: Is disclosure working?

By Lily Hsueh

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, saying regulators lack the power.

As the debate heats up, what is surprisingly missing is a discussion of whether disclosures actually influence corporate behavior.

An underlying premise of financial reporting is that what gets measured is more likely to be managed. But are companies that disclose climate change information actually reducing their carbon footprint?

I’m a professor of economics and public policy, and my research shows that while carbon disclosure encourages some improvements, it alone isn’t enough to drive down corporate greenhouse gas emissions. Worse still, 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 greenwash-resistant program.

Disclosure doesn’t always mean less carbon

Although carbon disclosure is often touted as an indicator of corporate social responsibility, the data tells a more nuanced story.

I investigated carbon disclosures made by nearly 600 companies that were listed on the S&P 500 at least once between 2011 and 2016. The disclosures were made to CDP, formerly the Carbon Disclosure Project, an organization nonprofit that polls businesses and governments about their carbon. emissions and management. More than half of S&P 500 companies respond to his requests for information.

At first glance, one might think that a mandated and unified framework for reporting data on corporate climate risk and management and greenhouse gas emissions, such as that proposed by the SEC, is likely to lead to more efficient use of fossil fuels, reducing emissions as the economy grows.

I have found that companies that have proactively disclosed their emissions to CDP have on average reduced their entity-wide carbon emissions intensity by at least one measure: carbon emissions per capita full-time employees. This means that as a business grows, it is estimated to reduce its carbon footprint per employee. However, this does not necessarily translate into a reduction in a company’s overall carbon emissions. Much of the decline was in large, emissions-intensive businesses, such as utilities, trying to get ahead of expected climate regulations.

About a quarter of S&P 500 companies that responded to CDP’s annual climate change survey have undertaken assessments of their business environmental impacts and have integrated climate risk management into their business strategy. Yet entity-wide emissions have increased further.

Previous research has found similar results in the first decade of the US Department of Energy’s voluntary greenhouse gas registry. Overall, he found that participation in the registry had no significant effect on companies’ carbon intensity, but that many companies, by being selective in what they reported, reported emission reductions.

Another study, which looked at the electricity sector’s participation in CDP surveys, found an increase in carbon intensity.

The “A-List” may not be exempt from greenwashing

Even companies that were on CDP’s coveted “A-List” of climate leaders aren’t necessarily immune to greenwashing.

A company earns an “A” grade when it has met disclosure, awareness, management, and leadership criteria, including adopting global best practices, such as a science-based emissions target, whether or not these practices result in improved environmental performance.

Since the CDP ranks companies based on their sustainability results rather than their bottom line, an “A-list” company could be “carbon neutral” when it only counts the facilities it owns. and not the factories that manufacture its products. Additionally, a company that scored an “A” could commit to eliminating 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 – offer an example of the challenge.

They regularly disclose their carbon management plans and emissions to CDP. But they’re also part of the industry-led Sustainable Apparel Coalition, which controversially described petroleum-based synthetics as the most sustainable choice over natural fibers in the Higgs Index, a measurement tool. of the supply chain that some apparel companies use to show a social and environmental footprint for consumers. Walmart has been sued by the Federal Trade Commission over products described as bamboo and “eco-friendly and durable” made from rayon, a semi-synthetic fiber made from toxic chemicals.

Designing a greenwashing-resistant disclosure program

I see three key ways for the SEC to design a greenwashing-resistant climate disclosure program.

First, misinformation or misinformation about ESG – environmental, social and governance factors – can be minimized if companies receive clear guidance on what constitutes a low-carbon initiative.

Second, companies may be required to compare their emissions targets based on historical emissions, submit to independent audits and report concrete changes.

It is important to clearly define the “carbon footprint” so that these measures are comparable between companies and over time. For example, there are different types of emissions: Scope 1 emissions are direct emissions from a company’s smokestacks and tailpipes. Scope 2 emissions are associated with a company’s energy consumption. Scope 3 is more difficult to measure – it includes emissions in a company’s supply chain and through the use of its products, such as gasoline used in cars. It reflects the complexity of the modern supply chain.

To finish, companies could be asked to disclose a fixed timeline for phasing out fossil fuel assets. 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 the net zero commitments made by companies are credible.

There is now momentum across the world to hold companies accountable for their emissions and climate commitments. Disclosure rules have been introduced in the UK, EU and New Zealand, as well as in Asian business hubs like Singapore and Hong Kong. When countries have similar policies, allowing for consistency, comparability and verifiability, there will be fewer opportunities for loopholes and exploitation, and I believe our climate and our economy will be better off for it.

Lily Hsueh is an associate professor of economics and public policy at Arizona State University.

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