Climate-related reporting continues to be a controversial topic. The U.S. Securities and Exchange Commission has withdrawn its defense of enhanced climate-related disclosures, the European Commission is debating how to scale back mandatory sustainability reporting requirements under its Omnibus revisions, and enforcement of California’s Senate Bill 261 has been temporarily blocked.

Nevertheless, at least 40% of firms by global market capitalization are expected to be subject eventually to mandatory climate-related reporting under the International Sustainability Standards Board (ISSB) standards. A major piece of these reporting standards is disclosure of the expected financial impacts (FIs) of climate-related risks and opportunities.

In a recent study, we rely on a global sample of voluntarily disclosed FIs to determine whether these explicit quantifications of climate-related risks and opportunities are relevant to investors. To the best of our knowledge, there is not yet any empirical evidence that would shed light on this question at a time when the value of mandatory FI reporting is being hotly debated.

FIs Are Highly Material but Irrelevant to Equity Markets

Our review reveals that the disclosed FIs are highly material financially to the firms disclosing this information with the FI of climate risks estimated to be approximately 5% of assets and 7.5% of sales for the average disclosing firm, and the future benefits of climate-related opportunities estimated to be approximately 10.5% of assets and 15.5% of sales. Yet we find that the FIs are surprisingly unrelated to equity-market performance. The FIs of overall risks and opportunities are not associated with firm values or equity bid-ask spreads. These findings suggest that the FIs are too unreliable to be useful to investors, with investors either not paying attention to them or giving them no value because the information they provide is too speculative and unlikely to be relevant to current stock prices.

Why FIs’ Irrelevance to Markets?

1. Problems With Financial Impact Reporting

First, a comprehensive manual review of the FI data suggests that many of the voluntarily disclosed FIs have problems. For example, many firms report the same dollar figures for multiple risks or opportunities (i.e., duplicates), report placeholder figures (e.g., “1” or “100”) instead of plausible estimates, do not link the FIs explicitly to the financial statements, or do not report in accordance with the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD)..

We also develop an algorithm and use GPT models to detect FIs that are either clearly erroneous or include text explanations that are too unhelpful to instill confidence in the reported figures. This approach reveals that a staggering 42% of reported FIs are insufficiently supported by their text explanations or of low quality. Importantly, however, even after dropping the most troubling FIs, the higher-quality disclosures remain surprisingly irrelevant to firm value or equity bid-ask spreads.

2. Investor Attention

Second, we consider whether the FIs are only relevant for firms whose investors are more likely to pay attention to the financial consequences of climate-related risks and opportunities. We find no robust evidence that investors in firms with higher emissions intensity or more institutional ownership are factoring the FIs in prices to a greater degree. However, consistent with greater efforts to transition to a green economy and stronger green investor preferences in Europe, we find that the FIs are associated with both firm value and bid-ask spreads for several subsets of European firms, although the overall region-specific results are rather more nuanced.

3. Financial Impact Imminence and Likelihood

Third, we focus exclusively on FIs that pertain to risks or opportunities that reporting firms themselves indicate are most likely, are relevant now, or will have the greatest impact. We document robust and economically meaningful discounts to equity market values for firms reporting risk FIs that they identify to be imminent, a result that is driven by physical risk FIs, whereas transition risk FIs are associated with a robust valuation discount when firms report their incidence to be likely. Overall, our combined findings suggest that investors are not inattentive to the FIs, but are discounting to zero all but the most imminent and likely financial impacts of climate risk.

Cheap Talk

In our final analyses, we explore whether the opportunity-related FIs are hollow, given that managers have an incentive to talk up share prices, potentially reducing the credibility and relevance of the disclosed opportunity-related FIs. Moreover, some firms may think that disclosing detailed data on future opportunities will weaken their competitive advantage, potentially further reducing the informativeness of the opportunities that are disclosed. However, we document robust positive associations between climate opportunity FIs and future green revenues, a result that appears to be driven by European and Asian/Oceanian (i.e., not North American) firms. In other words, opportunity-related FIs are a reliable indicator of future green revenue, which, recent research shows to be equity-market relevant. Yet our results show that these leading indicators are not being priced in by the market except in the case of a few subsets of European firms.

Implications and Takeaways

While our findings from currently available voluntary disclosures may not fully apply to a mandatory reporting regime, they nevertheless offer important insights for standard setters, regulators, investors, and reporting firms.

• Our analyses indicate that firm-provided FI data cannot be taken at face value because the underlying quality of the data is often low.
• Although there is no robust evidence for on average equity market relevance of FIs for our global sample of firms, the results are consistent with the notion that investors pay at least some attention to the FI data, and that the noise or low quality of the data does not explain the FIs’ irrelevance to markets.
• Instead, our results suggest that investors appear to heavily discount the FIs of all but the most likely or imminent
• Our opportunities findings further indicate that investors fail to factor in those opportunities at their peril as the opportunities FIs provide information about future green revenues, especially outside of North America.

Given the generally widespread market irrelevance of FI disclosures, we conclude that mandatory FI reporting may not be the most effective way to affect capital allocation and accelerate the transition to a sustainable economy.

Bjarne Brié is an assistant professor at Tilburg University, Elizabeth Demers is a professor at the University of Waterloo, Jurian Hendrikse is an assistant professor at IESEG School of Management, and Marcel Metzner is an independent researcher. This post is based on their recent paper, “Early Evidence on the Market (Ir-)Relevance of Climate-Related Financial Impact Disclosures,” available here.