Billions of dollars of commitments have been made by corporations to reduce carbon emissions. But without reliable and comparable corporate disclosures, investors will be unable to make informed judgments about the consequences for the value of their investments. To protect investors and to promote efficient capital markets, the Securities and Exchange Commission needs to establish minimum standards for carbon-related disclosures.
Ninety percent of the companies in the S&P 500 now issue “sustainability” reports. More than a trillion dollars of “green” bonds have been issued, almost $270 billion last year.
A third of the assets under management in the United States are now said to be “sustainable” investments. But in the absence of minimum corporate disclosure standards, investors face the risk of being unable to recognize corporate “greenwashing” hyperbole with the result that market prices will be unable to reflect investors’ views on the costs and benefits of reducing carbon – and our markets will fail to allocate capital efficiently.
Securities and Exchange Act of 1934
Even 300 years ago, with the creation of the first joint stock companies, observers recognized that the information asymmetry between insider-managers and outsider-owners needed to be addressed by the disclosure of corporate financial information. In the absence of disclosures, shareholders risked being misled by management. Corporate disclosure standards were slow in coming. Only with the Securities and Exchange Act of 1934 did the federal government require companies that issue traded securities to make routine disclosures of basic financial information.
The general requirement in the ’34 Act that information material to a company’s valuation be disclosed is vital but insufficient. It is vital because shareholders should know any information that is known to management that might materially affect the firm’s value. And without such a requirement, firms are unlikely to disclose all relevant information. It is insufficient because shareholders also need a baseline of factual information consistently disclosed across time in order to estimate the value of their investments as conditions change.
Headquarters of the U.S. Securities and Exchange Commission (SEC) on Jan. 28, 2021, in Washington, D.C. (Photo: Saul Loeb/AFP via Getty Images)
Investors also need all companies to make comparable disclosures in order to assess the relative value of different investments. Only with consistency across time and comparability among alternatives can investors assess for themselves the value of a firm and be reasonably protected against being misled. Only by the SEC setting minimum standards can we obtain adequate comparability.
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Standards need to be set and enforced
Minimum standards set and enforced by government are thus essential. They should include corporate decisions about carbon and an assessment of the current and forward-looking financial consequences for income statements and balance sheets, along with the key assumptions that go into making those assessments. Relevant decisions should include current or planned investments or accelerated asset retirements that affect gross or net carbon emissions. But to make sense of this information, companies will also need to explain the context for their actions by disclosing estimates of their carbon emissions, their assumptions about the future price of carbon and their particular (estimates of the) cost of reducing carbon on which their business plans are based.
Consistent disclosures by publicly listed companies will not be enough for capital markets to fully play their role in reducing carbon. Other measures will be needed. There is the risk that “dirty” or carbon-intensive assets will migrate to privately held companies, a risk that will need to be addressed by disclosure requirements enforced by the endowments, pension funds, other institutional investors, and the banks and other financial intermediaries who provide much of capital to these private markets.
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Still, the crucial first step, on which further efforts can build, will be for the SEC to establish minimum carbon-related disclosure requirements for all publicly traded companies. Without this, we will not be able to protect investors from greenwashing, nor should we expect an efficient allocation of capital in our economy.
Joseph Stiglitz is a professor at Columbia University, a Nobel Prize winner in Economics (2001), and served as a member and chairman in the Council of Economic Advisers for the Clinton administration from 1993-97.
Peter R. Fisher is a clinical professor at the Tuck School of Business at Dartmouth and served as undersecretary of the Treasury for Domestic Finance for the Bush administration from 2001-03.
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