Firms making empty climate promises don’t suffer, finds study

Analysis of thousands of big companies finds financial markets don’t penalise superficial green claims

Companies that make meaningless statements about their climate ambitions don’t suffer in financial markets, according to research published this week.

A study by academics from universities in the UK, Switzerland and Germany identified vague and empty claims in the annual reports of nearly 15,000 MSCI World index firms.

Using natural language processing, the researchers evaluated the proportion of a company’s climate commitments that are non-specific. For example, making general promises to reduce waste or increase recycling, but no providing details, timeframes or targets against which progress can be measured over time.

The findings were turned into an index to quantify the “share of superficiality” in companies’ climate commitments – also defined as “greenwashing wording” or “cheap talk” – compared with specific, meaningful pledges.

The index is based on reports published between 2010 and 2020.

“Our analysis reveals no significant differences in ROA or stock returns between firms with high and low [scores], suggesting that financial markets may not effectively penalise firms that engage in ‘cheap talk’ regarding their climate actions,” noted the authors.

“This non-result indicates that current market mechanisms might be insufficiently attuned to the nuances of climate disclosures, possibly due to a gap in investor literacy regarding the interpretation and implications of climate commitments and their actual environmental impact.”

The research also suggests that voluntary climate disclosures are associated with greater levels of superficiality, and that the amount of ‘cheap talk’ in a corporate report correlates with higher levels of negative media coverage and emissions growth.

Targeted climate engagement initiatives, such as involvement with shareholder network Climate Action 100+, are linked with lower levels of ‘cheap talk’, according to the findings.

The authors said the study demonstrated that there was a “compelling need for stronger regulatory frameworks” to mandate quantifiable and auditable disclosures on climate.