Going green is in fashion. Investments tagged as ESG — environmental, social and governance — now account for one-third of total U.S. assets under management. Issuance of green bonds reached the $1 trillion mark in October 2020 and the total continues to climb. And over 1,500 companies from a broad range of industries — including Ford, NRG and American Airlines — have pledged to reduce their climate change emissions to “net zero” by 2050.
What do these corporate pronouncements mean? Imagine you want to use your tax refund to buy stock and you pick the oil industry giant BP because you learn the company has pledged to become carbon neutral by 2050. Or suppose you are a young professional deciding whether to accept a job offer from the consumer products giant Amazon, impressed by the company’s claims that it is “committed to” sustainability.
Are corporate claims of going green alone a reliable basis for making such decisions?
Unfortunately, not. And it’s time for governments to take action to require companies to add rigor to their corporate pronouncements.
Take, for example, the recent rush by large companies to make “net zero” commitments — pledging to emit no more greenhouse gases than the amount they remove, by a specified date. Few of the firms setting these targets — about 17 percent — have disclosed a strategy for how they will go about meeting them.
The world’s largest asset management firm, Blackrock, recently called on corporate leaders to disclose how their company’s business model is compatible with a net-zero world, how they incorporate their net-zero plans into their long-term business strategy, and how their board of directors reviews those plans. Blackrock has committed itself to a net-zero path, but the firm still holds $85 billion in coal investments.
The fundamental problem? Without government oversight, companies can boldly proclaim they are confronting climate change while taking steps to do so at their own pace, in their own ways.
The current system is ripe for greenwashing. Some companies may be tempted to hang emissions reductions on investment in natural climate or untested solutions rather than reduce emissions in their own operations. While such a strategy might make sense for sectors such as the airline industry where alternatives to fossil fuels are still in development, it is questionable for an electric utility when wind power and solar energy are plentiful and cheap. Energy utility Southern Company’s net-zero strategy calls for 10 percent of its reduction to be achieved through reforestation and carbon capture, rather than further reductions in fossil fuel reliance.
Multiple entities ranging from the Commodity Futures Trading Commission to the Network of Central Banks and Supervisors for the Greening of the Financial System have urged greater transparency around risks and opportunities posed by climate change. Last month the Securities and Exchange Commission (SEC) created the new position of Senior Policy Advisor for Climate and ESG to “to oversee and coordinate the agency’s efforts related to climate risk.” The SEC is considering rules requiring companies to disclose how climate change will impact their businesses. It should further require companies to disclose how they plan to meet their net-zero pledges and how doing so will impact their business strategies.
Neither regulators nor companies have converged on a standard format for companies to share information making it impossible to compare how companies are tackling climate risks. A recently released report by KPMG found that only about half of the world’s largest companies acknowledge in their annual financial reporting that climate change poses financial risks. In many cases, the information companies share is “boilerplate,” unquantified and of little usefulness to investors seeking to understand potential exposure to climate risk and managers seeking to benchmark their company’s climate performance.
Most companies also fail to disclose information that’s deeply important: how climate change may impact their business strategies over the long-term. This is one of the key recommendations of the Task Force for Climate-Related Financial Disclosure (TCFD), a group of managers of global companies, investors and banks convened in 2015 under the leadership of Michael Bloomberg. In its recent status report, TCFD found that only 7 percent of reporting companies disclosed the resilience of their business strategies under different climate scenarios regarding increases to global average temperatures, which bring worsening extremes like drought, wildfire, flooding, heat and sea-level rise.
As a result of inconsistent reporting frameworks and lack of disclosure of the most important information, disclosure is “highly uneven and generally lousy,” according to Parker Bolstad and colleagues at the Brookings Institution. And, according to a new report by New York University’s Stern School, a meager 1 percent of people who oversee the workings of Fortune 100 companies through their seats on corporate boards have expertise in climate change. These factors mean that those concerned about corporate climate performance are “flying blind,” despite the growing number of companies that have embarked on climate reporting recently.
Other countries have begun to insist on climate disclosure. European Union regulators have already outlined an approach to climate related disclosure following TCFD. France began requiring institutional investors to disclose climate risk in January 2016. Late last year the UK Chancellor of the Exchequer took steps to require certain companies to improve their climate-risk reporting and economy-wide mandatory climate-risk disclosure rules are expected to be in place by 2025. New Zealand’s Ministry for the Environment has announced similar plans as have the Swiss.
Given the enormity of the risks and its outsized role in the global economy, the U.S. government should identify best practices embodied in TCFD and other reporting frameworks and mandate that companies follow them. Mandating disclosure achieves three critical outcomes.
First, it promotes accountability. As U.S. Supreme Court Justice Louis Brandeis once observed, “sunlight is the best of disinfectants.”
Second, it gives investors, shareholders, regulators and members of the public the capacity to monitor corporate climate performance and pressure laggards to improve.
Third, well-crafted disclosure requirements force companies to test their business plans against a hotter, more volatile climate, which in turn will push companies to craft risk management strategies that incorporate climate risk. Publicly sharing what they learn will allow investors to compare companies on the basis of their climate readiness.
The Securities and Exchange Commission may soon address these deficiencies. Gary Gensler, Biden’s choice to head the Commission, is thought to have his eye on mandatory disclosure policies. New acting SEC chair Allison Herren Lee has already indicated support for requiring companies to disclose their climate performance and risks. The SEC should act swiftly and to incorporate learning from a rich history of experience with environmental disclosure as they craft their requirements. Climate change will not wait.
Alice C. Hill is the David M. Rubenstein senior fellow for Energy and Environment at the Council on Foreign Relations and former special assistant to President Obama.
Jennifer Nash is the former director of the Business & Environment Initiative at Harvard Business School. Both are public voices fellows of the OpEd Project and the Yale Program on Climate Change Communication.