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Here Comes Climate Disclosure Regulation

Carbon is the new calorie… but it’s much harder to count.

Sustainable investing is taking off. Precise numbers are hard to pin down. As are precise definitions of what “sustainable” actually means. But it’s estimated that investment funds with green and/or sustainable mandates now account for more than a third of investment dollars in the US. Globally, Bloomberg is projecting that ESG assets will exceed $50 trillion by 2025.

Source: US SIF Report (2020)

This increased appetite for climate-friendly investments could be an important catalyst for climate action. In a best-case scenario, firms looking to get into the ESG game will work harder to reduce their climate impact. Climate-concerned investors will seek out climate-friendly firms to finance forward. Green capital markets at work!

But the reality is not so clean, green, and efficient.  One problem is that companies can claim to be greener than they actually are. Here in the U.S., lots of companies talk about their commitment to reducing climate impacts. But they are not required to back-up these statements with real data or action. This makes it hard for investors to distinguish good actors from green washers.


Economist Laura Starks and her co-authors recently surveyed over 400 institutional investors about their climate risk perceptions and management strategies. Institutional investors own more than 75% of US equities, so they have some serious weight to throw around. A majority of investors surveyed believe that climate risk is both underpriced in financial markets and financially material to their investment decisions.

To manage this climate risk, savvy investors are taking a variety of approaches.  “Analyzing the carbon footprint of portfolio firms” and “analyzing stranded asset risk” top the list in Laura’s survey. But these data-driven strategies will run into trouble if the available information is spotty or suspect. In this Schroders survey of institutional investors,  “Greenwashing” and “lack of transparency” are consistently ranked as the most vexing challenges for sustainable investments:


Can regulation fix this information problem?

Green investors are clamoring for better information. One way to meet these demands, particularly with regards to information about firms’ carbon emissions and climate impacts, is through regulatory intervention.

Last March, the Securities and Exchange Commission (SEC) asked for public comments on climate change disclosure regulation. Three out of four commenters supported mandatory standards that would require firms to disclose carbon emissions and climate risk metrics. SEC Chair Gary Gensler has since promised to develop a climate disclosure rule by the end of the year.

When talking up this idea, Gensler has been drawing parallels with regulated nutrition labels from the Food and Drug Administration (FDA). Today’s market for sustainable investment is like the grocery store aisle of the 1980s where hapless parents struggled to make sense of cereal boxes that made dubious claims of healthy contents.

Cue the Nutrition Labeling and Education Act in 1990 which gave the FDA the authority to specify how nutrition information is measured and mandate reporting on standardized labels. The onus is still on the consumer to figure out what 2 versus 20 grams of saturated fat per serving actually means to a cereal bowl. But these now-iconic nutrition labels have helped motivated consumers make healthier choices.

A similar idea is now being proposed for climate risk reporting. If companies are required to disclose standardized and comparable measures of their climate impacts, motivated investors can make more informed trade-offs that align with their fiduciary responsibilities and climate concerns.

This example is taken from a Blackrock report: Towards a Common Language for Sustainable Investing

Carbon is the new calorie, but it’s harder to count

The nutrition labeling analogy is good as far as it goes.  But it’s misleading in its simplicity. For a number of reasons,  standardizing disclosures about companies’ climate impacts  is going to be much harder to get right.

 What gets measured? When Kellogg’s is asked to report on how many grams of sugar is baked into their Fruit Loops, it’s relatively straightforward to agree on the boundaries of this measurement exercise – the servings in the cereal box.  Defining the boundaries of climate impact metrics is much trickier.

When Shell sells its Permian Basin assets to ConocoPhillips, it reduces the carbon footprint of its owned assets. But does nothing to reduce global emissions. Should divested carbon emissions be discounted in carbon accounting?

When a pipeline zeroes out all its operational emissions with carbon offsets, but does not count the carbon in the product it’s carrying, can it claim to be carbon neutral?



In other words, should a carbon footprint surround the product? The supply chain? The firm? The planet?  What gets measured will get managed. And possibly manipulated.

 Who gets regulated?  Virtually every food and drink you can buy at a grocery store comes with a nutrition label. Except alcohol which is not regulated by the FDA. Alcohol manufacturers have managed to fend off mandatory labeling regulation (to the frustration of consumer advocates).

When it comes to climate disclosure regulation, it seems possible – even likely – that mandatory SEC reporting standards will apply only to SEC-registered firms. If only public firms face mandatory reporting requirements, this will create an incentive to transfer assets and activities with large carbon footprints (however these are measured) from public to private firms. This regulatory arbitrage could seriously undermine the benefits of mandatory disclosure regulations. 

How to verify?  Investors want “decision-useful” information on carbon footprints and climate impacts. Ideally, disclosures would be comprehensive, comparable, and reliable. Herein lies a tension between developing disclosure rules that provide substantive insights into a company’s climate impact, and defining metrics that can be audited or verified. 

To verify the calorie count of your Cheetos, all you need is a bunsen burner and a thermometer (there are some pretty amusing DIY calorimetry videos on youtube). 

Auditing the calorie content of a cheeto

Auditing a company’s climate disclosures will be a much more involved exercise because it draws on many data sources and could require degrees in accounting, chemical engineering, and environmental ethics to fully understand. 

Next steps

Mandatory climate disclosure regulation is no substitute for direct regulation of greenhouse gas emissions. But it could be a critical complement. As momentum behind sustainable investing picks up, now’s the time to wrestle with some thorny questions about whether/how to regulate companies’ climate disclosures. 

With this in mind, I’ve teamed up with two true experts on this topic:  Laura Starks  (mentioned above) and Christian Leuz who’s written extensively about corporate carbon disclosures. On November 12, we’re hosting an NBER conference on Measuring and Reporting Corporate Carbon Footprints and Climate Risk Exposure. 

It’s important to emphasize that the views/rants in this blog are my own. The NBER conference is not about advocating for a particular regulatory intervention. It’s about hearing from experts who are pushing the frontiers of corporate carbon footprint measurement. And discussing the latest research on mandatory climate disclosure, climate risk assessment, and market pricing of climate risk. The conference will be livestreamed. If you’re still reading this blog, you must be interested in these topics. So mark your calendar and come join us!

Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas

Suggested citation: Fowlie, Meredith. “Here Comes Climate Disclosure Regulation” Energy Institute Blog, UC Berkeley, October 18, 2021,


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