Companies regularly set ambitious climate goals, but these plans often end up like many people’s New Year’s resolutions: unmet aspirations that quietly fizzle out.
While companies often gain positive media attention by trumpeting plans for reducing greenhouse gas emissions, many are failing to reach their climate goals, and the media rarely picks it up. There is little accountability and transparency on the outcomes of these goals, where various stakeholders, like investors and rating agencies that measure environmental, social, and governance (ESG) risk, do not penalize firms for missing these targets, according to new research by Harvard Business School Assistant Professor Shirley Lu.
Corporations, which collectively spew billions of metric tons of greenhouse gases, face increasing pressure to commit to climate change goals to reduce the global threat to ecosystems, weather patterns, and vulnerable communities. In 2016, the S&P Dow Jones Indices estimated that if every company in the S&P 500 index zeroed out its emissions, the reduction would roughly equal eliminating the combined emissions of France, Germany, and the United Kingdom.
“Reporting is not enough. If there’s no information dissemination, how is there an incentive for accountability?”
When it comes to corporate earnings, the market holds companies accountable to their forecasts, Lu notes. Public companies must disclose their performance, and when numbers fall short of expectations, investors often sell their shares, stock prices suffer, and executives can lose their jobs.
Meanwhile, companies that failed to meet their 2020 climate goals didn’t suffer similar repercussions, according to Lu and her coauthors, Xiaoyan Jiang, a predoctoral fellow at HBS, and Shawn Kim, an assistant professor at the Haas School of Business at the University of California, Berkeley. That makes it too easy for firms to reap the rewards of setting lofty goals without following through on them, which amounts to a lot of “cheap talk,” the researchers write.
Lu says the world needs better reporting and monitoring of emissions if it has any hope of reaching the goal of the 2015 Paris Agreement, an international climate treaty, which calls for capping global warming at 2 degrees Celsius.
“But reporting is not enough. If there’s no information dissemination, how is there an incentive for accountability?” Lu says. “And if we only start figuring this out by 2030, it may be too late.”
What happened when companies missed their 2020 goals?
The research team identified companies’ 2020 climate goals by studying data gathered by the CDP, a nonprofit that contains the largest depository of firms’ climate disclosures. The researchers identified 1,041 firms that collectively represent 2.5 billion tons of greenhouse gas emissions and on average promised to reduce emissions by 3 percent per year as their 2020 targets.
The researchers then dug into whether companies achieved their goals by examining their CDP reports as well as corporate press releases and sustainability reports. Of the 1,041 firms studied, 721 provided their status on the outcome of their emissions targets for 2020—which means that 31 percent of the goal-setters, in effect, vanished. Many of these firms that went silent were already falling behind in their target progress, and the media covered none of them.
Some companies—88 of the 721 reporters—failed to reach their 2020 goals. But the media only covered three of those company target failures: FedEx, Kraft Heinz, and Gildan Activewear. The three firms’ stock prices dropped around the time of that coverage, though the researchers caution that solid conclusions can’t be drawn from so few instances.
Collectively, investors didn’t react to the 88 companies that failed to reach their climate goals, and their stock prices didn’t immediately shift. Stock prices also didn’t respond to firms that achieved their goals or went silent. The reaction was largely indifference, the paper finds.
The researchers also examined stock trading volume to see if positive and negative views on climate goals might balance out. In other words, if different investors responded differently to emissions target outcomes, researchers would observe an increase in trading volume. Once again, investors seemed to shrug, as the researchers saw no abnormal trading.
“The fact that we observe no trading volume response around the release of the target outcomes supports the concern that investors may not be using the information or [are] finding the information largely uninformative or irrelevant,” the researchers write.
In addition, companies’ environmental scores didn’t change significantly after missing 2020 emissions reduction targets, which shows that environmental rating agencies didn’t punish companies for falling short of their goals either.
Voluntary reporting enables greenwashing
While the media is not reporting on most failures to meet climate goals, it does tend to cover firms that announce emissions targets. For instance, Microsoft’s claim to become carbon negative by 2030 made headlines. As of the end of 2022, a reported 3,904 companies had set emissions reduction targets.
The discrepancy in reporting may create an incentive for greenwashing: Companies can proclaim targets knowing they won’t be held accountable, Lu says.
“There should be some requirement for disclosure, no matter rain or shine.”
The problem is, corporate climate reporting is voluntary in many countries, and when there is no accountability, instead of reporting bad news voluntarily, some firms may choose to go silent, she says. For things to change, companies must be required to report their climate performance just as they do their financial status, Lu says. “There should be some requirement for disclosure, no matter rain or shine,” she says. “That will allow external parties to check companies’ progress.”
Such a requirement may arrive soon in the United States. In early 2022, the US Securities and Exchange Commission proposed mandatory reporting of public companies’ climate risks. Final rules are expected to be introduced next year.
In the meantime, Lu suggests that companies announce their emissions target outcome release dates in advance, similar to the way companies announce earnings. And when companies fall short of their goals and acknowledge those failures publicly, she encourages investors, analysts, and the media to give them some credit for coming clean.
“In a voluntary-reporting world, firms that set targets are likely better than those that don’t,” she says. “We don’t want to discourage that. Those that failed and then provided transparency, that’s good—we don’t want them to go dark.”
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Feedback or ideas to share? Email the Working Knowledge team at hbswk@hbs.edu.
Image: iStockphoto/HBSWK