Data quality needs to improve. But carbon disclosure and reporting continues to attract attention from the public, media, government, and business alike.
A Look at Carbon Disclosure Efforts
Despite an aggressive evolution of carbon disclosure methods, no single method has emerged to adequately allow stakeholders to compare reporting organizations.
Ans Kolk, David Levy, and Jonatan Pinkse explore issues surrounding the Carbon Disclosure Project (CDP), an international collaboration of investors focused on the business implications of climate change. Comprised of 385 signatory investors with more the $40 trillion (US) in assets, CDP provides climate risk profiles of the world’s 500 largest companies.
Anchored in extensive background on the evolution of carbon disclosure, the primary records analysis explores the effectiveness of CDP’s strategy of using investors to incentivize firms to disclose extensive information about their climate change activities.
Companies’ reactions to carbon issues are evolving from an oppositional political response toward preparations for a carbon-constrained future. Operational strategies in this ‘new normal’ include investing in low emission products and technologies, reducing emissions from operations, and developing the organizational infrastructure to assess, measure, and report greenhouse gas emissions.
Participation in the CDP has risen dramatically, from 46 percent of firms responding in 2003 to 77 percent in 2007, through response rates in North America continue to lag behind European counterparts.
Yet, increasing response rates may not make tools like the CDP more useful for investors. The researchers’ analysis raises doubts about the value of information from voluntary carbon disclosure initiatives. While interest in the CDP among firms and investors has been high, ambiguity around the interpretation of market risks and opportunities facing disclosing firms remains.
Carbon accounting disclosed in the CDP may be inconsistent and lack external verification making it difficult to compare firms. Without uniformity in process as well independent verification of the reported numbers, even experienced emissions analysts have difficulty making sense of a firm’s CDP reporting.
The authors argue this does not excuse stakeholders from pursuing a uniform metric, akin to financial reporting, so that carbon disclosures can become a more useful tool for all. Institutionalization of carbon reporting as a form of governance depends on successfully developing (and enforcing) a common metric.
Implications for Managers
Engage now and find opportunities. Corporate carbon disclosure is not going away and will only become more important over time. Certainly, while room for data improvement remains, this dynamic and expanding field will continue to attract high levels of attention from the public, the media, government and businesses.
Implications for Researchers
The growing availability of data provides opportunities for more in-depth investigations. Nevertheless, the authors warn that the quality of the information, and especially the drive to link incomplete and unchecked (e.g. self-reported) climate change information to financial performance, is something researchers should understand. Since some firms are more likely to respond to questionnaires than others, unrepresentative samples will also be an issue. Accounting researchers will play an important role in putting data in perspective.
Kolk, Ans, David Levy and Jonatan Pinkse. (2008) Corporate Response in an Emerging Climate Regime: The Institutionalization and Commensuration of Carbon Disclosure. European Accounting Review, 17(4): 719-745.