In the effort to counter the climate crisis, corporate reporting often figures as the key method for persuading companies to play their part in fighting the climate crisis. But this week differences have emerged on what has become a central belief. While MPs in Westminster this week placed their support firmly behind a set of global climate-related disclosure standards, academics elsewhere warn that reporting obligations alone is unlikely to be enough.
First the lawyers. Tobias Tröger and Sebastian Steuer write that disclosures are second best to other policy measures when it comes to triggering a “green transition”.
Writing for the Oxford University governance blog, Tröger and Steuer, of Goethe University, Frankfurt and the Leibniz Institute for Financial Research, conclude “the many forces that may prevent markets from achieving socially optimal equilibria render disclosure-centred green finance legislation a second best to more direct forms of regulatory intervention like global carbon taxations and emissions trading schemes”.
The pair find that investors may prefer “green” (according to corporate disclosures) investments over “dirty” companies—but there are problems. Though “dirty” companies may lose out when it comes to attracting capital, the pull of green companies may be “attenuated by countervailing interests in broad diversification and does not necessarily lead to socially optimal outcomes.” In other words, investors may still hedge their bets by placing their capital outside the realm of green investments.
The problem is exacerbated by the “tremendous uncertainty” involved in modelling the impact of climate change, they write. And they add that while green disclosures may do some good and help provide investors with information not all reporting is equal.
That being said “the precautionary principle” means it remains worthwhile sticking with green reporting.
In the House of Commons, MPs probing the stewardship of pension funds argue it would benefit from a single set of climate-related reporting standards. Members of the work and pensions committee have called on the UK government to use November’s COP26 meeting in Glasgow to secure an international on introducing global reporting standards.
“Global harmonisation of climate-related reporting standards would considerably reduce the burden on pension schemes and the associated costs of meeting different reporting requirements. It would also improve the comparability of different assets across international borders,” says the committee.
Climate reporting standards
UK companies have not impressed regulators with their climate reporting. In November last year the Financial Reporting Council (FRC), the UK’s governance and reporting watchdog, issued a report on climate reporting, which concluded companies “need to do more”. In one stinging criticism the report said “there is little evidence that business models and company strategy are influenced by integrating climate considerations into governance frameworks,” adding that it is “unclear” how climate issues inform decision-making.
The progress of carbon emissions reporting has also been under scrutiny. After an inspection, the FRC concluded companies were disclosing the bare minimum.
There is already an option for global standards—those produced by the Taskforce on Climate-related Financial Disclosures (TCFD), a project of the G20’s Financial Stability Board. Though unveiled in 2017 for voluntary use, the UK government has now laid plans to make TCFD reporting mandatory for the whole economy, the first G20 country to do so.
In the US, consultation is under way on the introduction of mandatory ESG reporting. While the project has met with vociferous opposition, many companies—including Apple and BlackRock—have called for the introduction of TCFD standards and work towards a global set of rules.
While the TCFD has attracted notice and support, another project is under way to produce global sustainability reporting standards. Run by the International Financial Reporting Foundation (IFRS) the project has already created a working group to map out baseline standards for global sustainability reporting.
Much faith around the world and at very senior levels has been invested in climate-related disclosures prompting a great deal of legislating and consulting. But Tröger and Steuer’s paper suggests it might be naive to think reporting alone will nudge companies towards engaging with the climate crisis.