Center for
Issue #51
December 2023
Sustainability Disclosure Regulation: Is It Effective?
Major economies around the world are introducing rules that mandate disclosures related to climate change and other aspects of sustainability. But do they actually work in making companies more sustainable and preventing greenwashing?
The initiatives are many. Europe has recently approved the Corporate Sustainability Reporting Directive (CSRD) for non-financial firms and the Sustainable Finance Disclosure Regulation (SFDR) for investment companies. In the US, the SEC has recently proposed an expansion of mandatory disclosures related to climate. 
Currently, firms follow a variety of voluntary reporting standards such as those proposed by the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI). Some of these frameworks have been consolidated over time and are being integrated into the new sustainability reporting standards, notably those developed by the International Sustainability Standards Board (ISSB) of the IFRS Foundation. In Europe, the European Financial Reporting Advisory Group is developing the so-called European Sustainability Reporting Standards (ESRS).
While sustainability reporting rules are not new (a number of countries have introduced some degree of regulation in recent decades), these mandates are unprecedented in terms of content, as well as breadth and depth of their requirements. 
The idea of using disclosure regulation as a tool to transition towards a more sustainable economy is somewhat controversial. One point of debate is whether such a mandate would impose an excessive onus on preparers. The costs include, among other things, the effort to gather and organize the information and the potential effects of releasing reports that could be used by competitors or other external parties that do not have a direct economic interest in the firm (e.g., regulators and activists).
At the heart of the debate on sustainability reporting regulation is also the question of whether the only objective of these rules is to ensure that firms provide information useful for decision-making (e.g., portfolio allocation decisions). More broadly, discussion has centered on whether regulations should be designed to influence companies’ behavior, namely, to improve sustainability performance or to prevent greenwashing. 
Of course, this raises the issue of who determines the intended behavior and introduces a political dimension into the reporting rules. Another problem is that the regulation might look good on paper, but not be effective in practice. For example, some critics argue that recent rules such the SFDR are not specific enough and could open the door for more greenwashing rather than less. Others question whether companies bear significant costs from a perceived disconnect between their sustainability claims and their environmental performance. At the same time, one could argue that regulators might not find sufficient grounds for conducting enforcement actions against greenwashing.
All the above suggests that it is an open question whether regulating disclosures provides meaningful incentives to push for sustainability. But we need an answer. Unfortunately, it is still early to conduct empirical analyses on the potential effect of these regulatory developments. Indeed, some of the above regulations have not yet been implemented, approved, or completed. Fortunately, however, there are already some rigorous studies that shed light on the question. Below I summarize their main findings.
Some studies have examined the mandatory greenhouse gas disclosure requirement that the UK introduced in 2013. They found that firms reduce their carbon emissions by an average of (roughly) 16 percent. Other studies, examining the mandatory disclosure requirement for powerplants in the United States, found that powerplants reduce their emissions by approximately 8 percent (among those publicly traded, the reduction was close to 10 percent). These percentages are not trivial.
Recent research has also explored the effects of introducing mandatory ESG/CSR disclosures around the world. In general, these academic studies have found that firms tend to expand and adjust ESG/CSR activities subject to disclosure requirements. This take-away also applies to specific settings such as the introduction of the EU NFRD (i.e., the predecessor of the CSRD), the mandatory disclosure of extraction payments for oil and gas firms in the EU and Canada, and the inclusion of mine-safety information in regulatory filings. 
The same holds true for disclosure mandates imposed on financial firms. Recent academic literature provides evidence that the introduction of the SFRD in the EU has been followed by a reduction in the carbon emissions of investment fund portfolios. Moreover, research shows that ESG disclosure regulations imposed on banks generate transmission effects along the lending channel.
Taken together, the findings of these studies are consistent with the notion that mandating the release of sustainability information induces regulated firms to step up their efforts to transition towards a more sustainable economy. But does this mean that regulation is an effective tool for such a transition? The answer is not straightforward. Regulations introduce significant costs and often have complex unintended spillovers. And the devil is in the details: we should not expect the same effect from all forms of sustainability disclosure rules. 
In any case, all this suggests that there are good reasons for boards to pay close attention to the ongoing regulatory developments in sustainability reporting – including their potential impact on their firms’ P&L and valuation as well as the consequences for the whole economy.
Corporate Governance Trends and News.

Legal developments on environmental disclosures keep moving forward and more companies are announcing their plans to reduce or eliminate carbon emissions which may require some form of carbon offsetting. Sullivan Cromwell summarizes the regulatory developments recently made on the issuance of voluntary carbon credits, the required disclosures and the potential consequences arising from the lack of international standardization.
Read more here 
In the past weeks, the governance structure of OpenAI has been highly discussed because of Sam Altman’s departure and reinstatement as CEO and their complex organizational structure. These recent events highlight the importance of an ownership structure that allows the implementation of an effective governance system.
A recent blog post by Glass Lewis provides some interesting reflections on this matter. 
Read more here 
The appointment of the CEO is one of the key functions of the boards of directors. However, CEO succession can be a challenging process because not many directors have relevant experience in this area. PwC has recently published an interesting article that offers some interesting reflections on the importance of CEO succession and leading practices on this subject.
Read more here 
As a consequence of the universal proxy rules implemented last year by the Securities and Exchange Commission, a coalition of labor unions that own a small stake of Starbucks have been able to nominate three candidates for board seats at the company, emerging as a new kind of social activist investors. 
Paul Hastings has recently published an article that offers some interesting insights on social activists and universal proxy cards.
Read more here 
The annual United Nations climate meeting (COP28), which is currently being held in Dubai, has generated lots of debate on the measures that should be adopted by policymakers to reach net zero emissions and the elimination of fossil fuels. 
Some interesting reflections on how companies can address the transition to reach net zero emissions can be found in this recent article published by McKinsey.
Read more here 
IESE's Recent Research.

Antón, M., Ederer, F., Giné, M., Schmalz, M. (2023). Common Ownership, Competition, and Top Management Incentives. Journal of Political Economy.
Read here
Cohen, S., Kadach, I., Ormazabal, G. (2023). Institutional Investors, Climate Disclosure, and carbon emissions. Journal of Accounting and Economics, 81.
Read here
Bonetti, P., Ormazabal, G.  (2023). Boosting Foreign Investment: The Role of certification of corporate governance. Journal of Accounting Research, 61(1), 95-140.
Read here
Fernandes, N. (2023). Climate Finance.
Read here
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