By Caroline Flammer, Boston University; Michael Toffel, and Kala Viswanathan, Harvard Business School


Climate change poses increasing risks and costs to companies, from tech firms in Silicon Valley to financial institutions in Europe. But in the absence of mandatory disclosure requirements, can private actors – such as shareholders – elicit greater corporate transparency with respect to climate change risks?

Direct and indirect impacts from climate change

Climate change risks present important challenges for companies across regions and industries. These include physical risks (e.g., flooding, wildfires, extreme temperatures), regulatory risks (e.g., carbon tax, emission limits), and other risks (e.g., reputational risks, shifting consumer demands).

For example, flooding and fierce storms disrupted the US pharmaceutical company Eli Lilly’s manufacturing facilities in Puerto Rico after Hurricane Maria in 2017. Japanese manufacturer Hitachi reports that increased rainfall and flooding in Southeast Asia could disrupt its supply chain. Banco Santander Brasil expects that increasingly severe droughts in Brazil might hurt the ability of borrowers to repay loans. And Google’s parent company, Alphabet, expects that rising temperatures could increase the cost of cooling its energy-intensive data centres.

The list goes on. In all these examples, climate change has, or could have, a direct impact on companies’ operations and customers. Climate change can also hurt companies indirectly – such as energy companies facing significant financial risk caused by stranded assets.

Lack of disclosure requirements and the role of shareholders

Companies need to be aware of these risks, as do shareholders, when it comes to assessing the exposure of their portfolios. However, companies often fail to disclose their climate risk exposure and what strategic actions they may (or may not) take to manage and mitigate these risks. This is partly due to the absence of mandatory disclosure requirements of climate risk-related information (and non-financial information more generally) in many countries around the world. For example, the US Securities and Exchange Commission merely recommends that companies disclose their climate change risks, but does not mandate such disclosure nor does it offer any guidance as to what information should be provided.

In a recent study (forthcoming in the Strategic Management Journal) we look at the role shareholders can play in this context.

Shareholders are becoming increasingly vocal in demanding that their portfolio companies disclose their exposure to climate change risks. Recent examples of companies that faced such pressures include BP, Exxon Mobil, Occidental Petroleum, and PPL Corporation. Proxy advisory firm Institutional Shareholder Services anticipates that 2021 will yield a record number of shareholder proposals advocating the disclosure of climate change risks.

How do stock markets react to shareholder activism and greater disclosures?

To obtain insights beyond these anecdotal accounts, we examined data on S&P 500 companies’ climate risk disclosure to the CDP[1] from 2010 to 2016. We found that shareholder activism is effective in inducing climate change risk disclosure, especially if initiated by institutional investors, and even more so if they have a long-term holding horizon.

Moreover, we examined how the stock market reacts to the disclosure of climate change risks following shareholder activism and found a positive response, with disclosing companies’ stock prices increasing by 1.21% on average (on a market-adjusted basis). This indicates that investors tend to value greater transparency with respect to climate change risks.

Our findings have important implications, highlighting the ability of shareholders to elicit greater corporate transparency with respect to climate change risks and thus contribute to their portfolio companies’ governance. In the absence of mandatory government-imposed disclosure requirements, this greater ability also implies that shareholders – in particular, long-term institutional shareholders – have a greater responsibility to be active owners and engage with management to elicit greater climate risk-related disclosure.

However, shareholder activism need not be a substitute for mandatory government-imposed disclosure requirements. Arguably, the latter might be more effective in i) improving the quantity and quality of disclosure; ii) fostering the standardisation of disclosure; and iii) ultimately achieving progress in the fight against climate change. In this regard, a mix of shareholder activism advocating for voluntary climate change risk disclosures and shareholders’ (and companies’) engagement with governments to impose mandatory disclosures might be a fruitful avenue to pursue.




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