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E-MailShirley Lu is an Assistant Professor of Business Administration at the Harvard Business School, Shawn Kim is an Assistant Professor of Accounting at the University of California Berkeley Haas School of Business, and Xiaoyan Jiang is a Predoctoral Fellow at the Harvard Business School. This post is based on their working paper.
Companies play a vital role in achieving the Paris Agreement to limit global warming to 2 degrees Celsius above pre-industrial levels (the 2-degree scenario). As of the end of 2022, 3,904 companies have set emissions reduction targets, of which 1,859 have been approved by the Science-Based Targets Initiative to be in line with the 2-degree scenario. Announcements of these emissions targets, such as Microsoft’s claim to become carbon negative by 2030, often make media headlines. Yet it remains unclear if there are oversights of these claims and whether firms are held accountable for the target outcomes. In the absence of accountability, firms may lack sufficient incentives to pursue genuine decarbonization efforts, leading instead to opportunities for cheap talk, raising concerns about the overall credibility of these emissions reduction targets.
In this paper, we study whether there is accountability for companies’ emissions targets that ended in 2020 (i.e., targets with final target years of 2020). More specifically, we ask three questions related to such accountability. First, what are the target outcomes and can they be meaningfully interpreted? Second, what is the level of transparency (e.g., firm disclosure, media dissemination) of the target outcomes? Third, are there any consequences associated with missing emissions targets, and if so, what are they?
To answer the first question, we examine the outcomes of the emissions targets. To the extent that firms are held accountable to the targets, we expect the outcomes to be readily available and easy to interpret. Out of the 1,041 firms, only 721 firms provide status on the completed emissions targets that end in 2020. In other words, 320 (31%) firms set an emissions target in an earlier year with a target year of 2020, but we cannot find information about the outcomes of the targets in 2020 or after, and we label them as “disappeared firms.” Of the 721 firms with target outcomes, 88 firms have a failed emissions target. We label these 88 firms as “failed firms” and the remaining as “achieved firms.”
To answer the second question, we study the level of transparency of target outcomes by examining corporate disclosure and media coverage of target outcomes. While CDP is the central source for the disclosure of emissions targets, we examine how companies disclose target outcomes through other channels. Specifically, we consider press releases and sustainability reports for firms’ voluntary disclosure. We manually search for the 2020 sustainability reports of firms with failed targets, and out of 88 failed firms, we find 78 firms’ sustainability reports. By examining these sustainability reports, we find 26 firms that acknowledge that the 2020 target outcome is less than 100% completed, and only 16 that explicitly acknowledge it by using words like “missing” or “fail to achieve.” We also manually search the Ravenpack database for press releases on the outcome of the 2020 emissions targets. We do not find any press releases about missing the target for the failed firms. In contrast, we find 12 news articles of press releases for the achieved firms.
Next, we examine the public awareness and dissemination of the target outcomes by studying media coverage of the target outcomes. For all sample firms, we search in the Ravenpack and TruValue Spotlight databases for news articles (excluding press releases) on the outcomes of 2020 emissions targets. Among the 88 firms with failed targets, only three are covered by the media, and all of these three have acknowledged the target failure in their sustainability reports. For the achieved firms, we identify 14 news articles that are associated with their target outcomes. Among those 14 news articles, 6 are linked to the firm’s own press releases on the target outcomes. We do not find media coverage of targets that have disappeared. Overall, the observations suggest weak information dissemination about target outcomes, and that the media are more likely to report on target outcomes based on firms’ own disclosure of target performance, as opposed to independent reporting of emissions target outcomes.
To answer our third question, consequences for missing emissions targets are evaluated, considering market reactions, changes in shareholder proposals, media sentiment, and environmental scores. We observe insignificant capital market reactions to target outcomes, including both market returns and trading volumes. Changes in shareholder proposals, media sentiment, and environmental scores also show no significant negative impact on failed firms. Overall, our paper finds limited evidence of accountability over firms’ emissions reduction targets that ended in 2020, and that the lack of public awareness and transparency potentially explains the lack of consequences from missing these targets.
Contrasting findings with the announcement of new targets highlights a disparity in attention. While failing a target has limited media coverage, announcing new targets receives widespread attention. Firms actively disseminate new targets and the media actively covers them. We also find that the media and certain market participants, particularly ESG rating agencies, view setting new targets as positive. Our findings suggest that stakeholders reward firms for setting emissions targets, but do not hold firms accountable for the outcomes of these targets.
Our findings shed light on the challenges in holding firms accountable for the emissions reduction targets and emphasize the need for enhanced institutional support, transparency, and awareness in the pursuit of genuine corporate decarbonization. First, our study reinforces the proposed SEC climate disclosure rule requiring firms to disclose emissions targets and annual progress toward them. Second, our result highlights the need to facilitate timely dissemination of target outcome information. Potentially, setting emissions announcement dates, similar to earnings announcement dates, can help align attention from media and other stakeholders. Literature in earnings announcements highlights the importance of preannouncing earnings release dates and that the timing of announcement dates affects information dissemination. Third, we need monitoring institutions to keep track of the target outcomes (e.g., Oxford Net Zero Tracker), paying particular attention to firms with targets that disappeared, and providing analysis to evaluate target performance.
