Shining some sunlight on mandatory corporate climate-related disclosure

Governments and regulators are obsessed with climate-related disclosure. Canada, the United Kingdom, Hong Kong, China, the European Union and even the United States have developed or may develop legislation or rules that require firms to disclose climate-related financial information in line with the Task Force on Climate-Related Financial Disclosures’ (TCFD) recommendations. The expectation is that these mandatory corporate climate-related disclosure regimes (MCDRs) will increase market efficiency and potentially support an accelerated transition to a global low-carbon economy. This article shines some sunlight on these core, flawed assumptions. I identify four common features shared by most and, potentially, all of the MCDRs from the jurisdictions above, which may limit their expected impact on market efficiency: (1) a phased-in approach to implementation, where the disclosure of more reliable, decision-useful quantitative information will not be available to investors for several years; (2) disclosure on a comply-or-explain basis, which may confuse investors and result in unexpected market reactions; (3) misalignments with the TCFD’s recommendations; and (4) a public enforcement gap. Whether these MCDRs will help accelerate the transition to a low-carbon global economy is also questionable. Any improvement in climate- related disclosure within public markets will not direct investor capital towards the private market investments necessary over the next decade for governments to meet their targets under the Paris Agreement. There is also no guarantee that firms that think about climate change will act more sustainably, at least until a critical mass of their most powerful stakeholders meaningfully react to their climate-related disclosures. The article concludes by identifying two dangerous possibilities associated with the growing global obsession with MCDRs, which includes recent legislative moves to impose TCFD-related disclosure requirements on other financial actors. The first is the spread of inefficiencies throughout the financial regulatory landscape, if governments and regulators fail to understand, acknowledge and address the insights from this article, which I argue apply to MCDRs across the investment chain. The second is the risk of tunnel vision or path dependency if there is a narrow focus on disclosure to the exclusion of other, potentially more innovative and effective regulatory tools.