Effective climate policy requires understanding where emissions come from, how they are changing, and whether companies’ efforts are leading to real reductions.
Concerns about the environment are increasing
Climate change is not only wreaking havoc on the environment, it is also causing a mental health crisis for young people.
Imagine going to your doctor, who gives you a clean bill of health, only to be called a few weeks later to be told that the test results actually showed a problem. Now imagine if they did the exact same thing again on their next visit. You’ll probably start looking for a new doctor.
That’s the scenario Americans face when it comes to corporate climate data.
When investors pour billions of dollars into sustainable funds, when policymakers create climate regulations, and when consumers choose where to shop based on environmental concerns, they all assume that companies’ emissions data are accurate. But new research from Harvard Business School reveals the troubling reality that that assumption is fundamentally wrong.
An analysis of emissions disclosures filed by S&P 500 companies over a 10-year period found that 74% of companies revised their reported greenhouse gas emissions at least once. This is no small accounting adjustment. We are talking about 135 million tons of underreported emissions, which is more than the entire annual emissions of Venezuela, Nigeria, Qatar, and Kuwait in 2020.
Frankly, we operate in a world without actionable corporate climate data.
The investor dilemma regarding corporate climate data
Revisions in and of themselves do not necessarily mean that a company is intentionally misleading stakeholders. In fact, the ubiquitous revisions may indicate that many companies are committed to accurate disclosure. There is a connection with executive compensation.
This analysis shows that there is a correlation, but not a conclusive relationship, between executive compensation tied to emissions targets and emissions data revisions. When companies add sustainability incentives to executive compensation, they are more likely to reassess their emissions. Furthermore, this situation tends to occur more frequently in companies with governance problems.
Whatever the reason for the revision, the impact on markets and those concerned about the environment is profound.
For example, this level of inaccuracy represents an information crisis for investors. 89% of investors now consider environmental, social and governance factors when making allocation decisions. ESG-focused institutional investment is projected to reach $33.9 trillion globally by 2026, nearly double the $18.4 trillion in 2021.
These are not minor portfolio adjustments, but fundamental changes in the flow of capital in the global economy.
But what happens when the data supporting these trillion-dollar decisions is unreliable? When investors compare Company A’s emissions trends to Company B’s emissions trends, they are essentially making choices based on numbers that can be revised – sometimes significantly – in later years. The California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the United States, has committed to moving its entire portfolio to net-zero carbon emissions. How can we achieve such ambitious goals as measurements continue to change?
Unlike financial recalculations, which occur annually in only about 3% of public companies and require detailed disclosure to the Securities and Exchange Commission, emissions revisions occur with surprising frequency and minimal explanation. Companies often embed changes in footnotes or omit them entirely. This is more than just an inconvenience. This is a fundamental market failure that prevents accurate risk assessment.
For lenders, for example, unreliable emissions data creates risks they may not even be aware of. Climate risk is increasingly understood as a financial risk. Banks and other financial institutions are developing sophisticated models to assess climate-related credit risks, determine loan terms, and manage portfolio exposure to carbon-intensive industries. But these models are only as good as the data you feed them.
How can lenders accurately factor climate risk into loan agreements when a company’s reported emissions can change by millions of tonnes with retroactive adjustments?The answer, at least with confidence, is that they can’t.
Policymakers are in the dark about global warming
Policy makers face perhaps the most significant challenge yet. Effective climate policy requires understanding where emissions come from, how they are changing, and whether companies’ efforts are leading to real reductions. Without reliable data, policymakers are essentially acting blindly.
The lack of federal emissions disclosure requirements created a regulatory vacuum following the Trump administration’s withdrawal from the SEC’s climate regulations. There are no federal laws requiring companies to report their greenhouse gas emissions, no widely disclosed standards, and little accountability when data is inaccurate.
States like California have begun enacting their own laws, but they don’t necessarily solve fundamental data quality issues and create a complex patchwork of regulations.
It is impossible to assess whether regulatory efforts are effective unless emissions are accurately measured in the first place.
Stakeholders need to be better informed by corporate climate data
Beyond investors, lenders and policy makers, there is a broader ecosystem of stakeholders that rely on accurate emissions data. Employees, especially younger employees, increasingly want to work for companies that are truly committed to the environment. Consumers make purchasing decisions based on sustainability claims. Communities assess local environmental impacts. Supply chain partners assess each other’s environmental impact.
All of these stakeholders make decisions based on data that is frequently revised and that research shows is undervalued. This is more than a number on a page. It’s about trust.
Even if a company pledges to achieve net-zero emissions or reduce its carbon footprint by a certain percentage, that promise rings hollow if the underlying measurements are unreliable.
It is clear that the voluntary reporting system is not working. Accuracy has not been improved by guarantees from third parties. Market pressure alone is not enough. What we need are standardized reporting requirements with real accountability, and strong regulations that create meaningful consequences for inaccurate disclosures, similar to corporate financial disclosures at the SEC.
Until that happens, investors should remain cautious and assume there is a possibility of underreporting. Lenders will need to incorporate greater margin of error into their climate risk models. Policy makers should prioritize improving metrics and enforcement. And all stakeholders must demand better, because the stakes are too high to accept anything less than accurate data.
Lauren Cohen and Ethan Luan are professors at Harvard Business School. Kunal Sachdeva is a professor at the University of Michigan. Their research on corporate disclosure data nature climate change and Harvard University International Social Business Research Institute.
