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Are climate initiatives reducing corporate chatter? | blog post

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As the world becomes more aware of the urgent need to act on climate change, more companies are making pledges and pledges to help mitigate the problem. Their commitments provide essential information to market participants and regulators and can influence how the public perceives them. However, with Earth recording its highest daily average concentration of atmospheric CO2 during the second week of May 2022, it is essential to monitor these promises and determine if their actions speak as loudly as their words.

How are companies’ climate information and commitments changing?

In our recent study, we analyzed 14,584 annual reports, spanning a ten-year period, from the 1,543 companies included in the MSCI World Index (as of January 2021) to assess the effectiveness of climate initiatives in influencing the way companies disclose and adhere to their corporate climate commitments.

We have developed a methodology based on natural language processing to help investors separate the wheat from the chaff. In particular, we analyzed what these companies disclosed as their climate commitments and actions in their annual reports.

We then used ClimateBERT, a large pre-trained deep neural language model, to differentiate between specific (numerical and quantifiable) and non-specific commitments. We used the ratio of non-specific commitments to all commitments as a score to construct a cheap talk index, which was used to assess the quality of companies’ climate commitments publications.

Although our research shows that corporate engagement in climate-related texts increased by almost 20% between 2010 and 2020 (see Figure 1), we see a rather alarming result: during the same period, the number of non-specific and descriptive climate commitments – chatter – compared to those mentioning specific quantifiable objectives, increased by nearly 80%.

Figure 1: How climate-related liabilities and their cheapness have increased among constituents of the MSCI World Index.

We then focused our analysis on the financial institutions included in the MSCI World Index (see Figure 2). Their commitments have increased by more than 150% between 2010 and 2020, much more than the MSCI World index as a whole (nearly 20%). At the same time, the amount of cheap lyrics also increased by more than 60%.

The financial industry therefore appears particularly keen to make climate commitments. The years to come will show whether the industry will be able to deliver on these promises or whether we will see an increase in climate litigation.

Figure 2: How climate-related liabilities and their cheapness have increased among financial constituents of the MSCI World Index.

Charts showing how climate-related pledges and cheap talk increased between 2010 and 2020 among financial institutions in the MSCI World Index

Can climate initiatives affect corporate cheap talk?

With this surprisingly large increase in cheap talk over the past few years, we next explored whether different climate initiatives could help companies discipline to provide useful information for decision-making. We focused on members of three climate initiatives: the Task Force on Climate-related Financial Disclosures (TCFD); Climate Action 100+; and the Science Based Targets Initiative (SBTi).

We focused on these three initiatives because they serve three different economic channels: signaling (TCFD), engagement (Climate Action 100+), and credibility (SBTi).

Surprisingly, we found that supporting TCFD disclosure recommendations led to an increase in cheap talk, confirming our findings from a previous article, while being a Climate Action 100+ target company led a decrease.

Our SBTi analysis did not provide statistically significant results. However, setting goals through the SBTi seems to reduce cheap talk with a year lag, albeit slightly.

Our analysis therefore reveals that of the three economic channels, it is engagement (for example via participation in Climate Action 100+) that compels companies the most to provide specific information on their climate actions.

Why did we use company annual reports for our data?

There are several reasons why we focused on annual reports as a source of text and not, for example, on results calls or sustainability reports:

  • Many initiatives, such as the TCFD, encourage their supporters and signatories to post climate-related news through this channel.
  • Annual reports are where stakeholders expect to find financially relevant corporate information and where companies will be legally required to publish climate-related information in the near future.
  • The legally binding nature of annual reports provides stronger incentives than corporate sustainability reports to disclose accurately.
  • There is ample evidence that the information in annual reports is indeed valuable and informative.

Why should we care about cheap talk in annual reports?

In this time of unprecedented economic change, it is difficult for investors to assess the impact of climate change, climate policy and corporate climate ambition statements on company value and portfolio strategy .

Financial stakeholders should understand a company’s climate risk and whether its disclosed climate actions and commitments will help mitigate future physical and transition risks, and use this information to actively manage related financial risks and opportunities. to the climate.

However, we confirm the widespread concern of regulators, market participants and academic researchers regarding current market inefficiencies: information on climate risks is, to date, not sufficiently standardized and lacks precision.

Companies are not providing sufficiently detailed and decision-useful information in their climate reports. Without a concrete plan and follow through, these voluntary initiatives are nothing more than talk.

Our findings have important implications for investors and financial supervisors.

First, targeted engagement with institutional investors could significantly improve the quality of climate disclosures by companies, particularly when communicating about the usefulness and accuracy of their climate commitments and actions for decision making. investment decision.

Policy makers should therefore promote this path, for example by protecting and strengthening investors’ rights and encouraging investors to engage with their investment partners on climate issues.

Second, corporate TCFD support is not yet a reliable indicator of corporate climate engagement.

Instead, our findings suggest that without additional regulatory provisions, standardization and guidance, the voluntary or mandatory disclosures recommended by the TCFD do not provide sufficiently accurate information for stakeholders to make informed investment decisions.

This article was presented during PRI Academic Network Week 2022.

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This blog is written by guest academic contributors. Our aim is to contribute to the wider debate around topical issues and help present research for the benefit of our signatories and the wider community. Please note that while you can expect to find articles here that broadly reflect the official views of the PRI, the blog authors write in their individual capacities and there is no ‘inside view’. The views and opinions expressed on this blog also do not constitute financial or other professional advice. If you have any questions, please contact us at [email protected]


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