Bridging the divide between climate disclosure and investment decisions

Jackie Cook

In a carbon constrained world, investors are calling for improvement in non-financial disclosure of climate information. Despite these calls, investors are receiving a plethora of information, hindering their decision making.

by Jackie Cook, founder of Fund Votes, CDSB Technical Working Group member. Source:CookESG

Recent academic research suggests that as the portion of corporate market value attributable to intangible assets increases investors are becoming more interested non-financial ESG disclosures, particularly on climate change.

In an increasingly carbon-constrained global economy and in a new competitive environment in which sustainability is seen as a competitive advantage, narrative ESG disclosure will become an even more important source of information as well as a signal in itself of governance preparedness.

Indeed, it was in response to investor calls for improved disclosure of climate risk under existing securities law, that the U.S. Securities and Exchange Commission (SEC) issued interpretive guidance in February 2010. The SEC’s guidance draws heavily on the petition submitted by Ceres on behalf of members of its Investor Network on Climate Risk (INCR) in 2007 and supplemented in 2008 and 2009.

The issuance of this guidance is a very positive step forward: firstly, the promise of improved transparency and reduced investment risk; secondly, a formal acknowledgement of a potentially devastating systemic weakness as yet un-recorded in corporate accounts and not yet incorporated into mainstream valuation models; and thirdly, a stage along the route to possible rule making in this area.

Yet recent academic research also shows that, while investors are requesting ESG disclosure, they are not making adequate use of it.[1] Quality and comparability are blamed.

An informal read of 2012 climate risk disclosures in U.S. 10-K (annual report) filings reveals that, within a single sector, one encounters a spectrum of reporting, ranging from detailed, specific information to vague, boilerplate statements.  Without reference to standard carbon accounting metrics to anchor the narrative disclosure it is difficult for investors to compare risks and strategies across companies.  Without much digging and cross-referencing it is difficult, time consuming and fundamentally expensive to get the full picture for just one company, much less an informed and up-to-date survey of the status of climate risk reporting across a peer group of companies or across all publicly listed companies.

This leaves the promise of the 2010 disclosure guidance not yet fulfilled and creates a real problem for anyone trying to assess the implications of climate change for any single business or industry or for the market as a whole.

Moreover, investors are hesitant to make investment decisions on the basis of non-verified disclosures and many investment decision-making models have not evolved to incorporate information contained in open-ended disclosures.

Clearly, the CDSB, in promoting and refining a rigorous international framework for the disclosure of climate change-related information in corporate reports, has a crucial role to play in addressing this catch-22 situation and in unleashing the value of securities-related climate risk disclosure.

Since 2004 Fund Votes has sought to track U.S. and Canadian institutional investor stewardship exercised through proxy voting on ESG issues.  Shareholder advocacy on ESG issues has convincingly articulated the need for improved disclosure and specific campaigns have achieved tangible successes in this regard.

My recent research is aimed at raising the visibility and facilitating the comparability of narrative climate risk disclosures made in annual securities filings in the U.S. as well as testing automated methods for evaluating the usefulness of these disclosures.  Within the context of a growing international movement aimed at raising the extent and quality of corporate climate disclosure and sustainability reporting in general it is envisaged that this work would, for instance, provide empirical substance from which to develop more specific policy and voluntary mechanism proposals for climate reporting as well as encourage improvements in the quality of narrative climate disclosure - revealing best practices and encouraging emulation by peers.

Jackie Cook is the newest member of CDSB's technical working group.


[1] See, for instance, Sullivan, R. and Goudson, G. (2012). Does voluntary carbon reporting meet investors’ needs? Journal of Cleaner Production, March 2012; Campbell, D. and Slack, R. (2012). Environmental disclosure and environmental risk: Skeptical attitudes of UK sell-side bank analysts. The British Accounting Review, Vol. 43(1) 54-64.