Sorry for being contentious, but.… Cochrane is remarkably clever in his papers, but I fail to see cleverness here. For instance, one of his main rants is about SEC’s proposing that firms disclose their carbon footprint; it’d be financially irrelevant, right? However, there’s a strong consensus among economists and institutions on the need for higher carbon prices. So it’s expected that, in the long run, carbon intensive companies will pay more for their emissions; disclosing data on emissions is all about allowing investors to manage long-term financial transition risks (due to future carbon prices).
Am I wrong about this? I don’t think so – this is often quoted by regulators and companies as one of the reasons to disclose data on emissions; ofc, talk about “social responsibility” is better for optics. But see this IGM Poll and contrast (a) the consensus that such data will allow investors to make better decisions with (b) the uncertainty that it will be positive for climate change. Does Cochrane ignore this? Unlikely, he is super smart; Cochrane himself has written about carbon prices. So maybe he just doesn’t care enough, or I didn’t fully understand his point.
If it’s a material risk risk, companies already have to disclose it as a risk factor. What makes this unusual is 1) it requires a very costly data gathering exercise 2) it opens companies up to very large legal risk about their precise methodology and 3) it is required of all companies, even if the risk is not material to them.
As an example, at least one of the economists in the poll you linked thought it would help investors make decisions, but was still a bad idea:
Probably the costs of a mandate exceed the benefits. The uncertainty is for firms where the impact is small and indirect. Climate is a risk that might be hidden.
It might be useful to consider an analogy with the opposite political valence. Many companies in the US employ, or deal with other companies who employ, immigrants, including illegal immigrants. This causes political risk; there may be changes to immigration rules, or an increase in enforcement and deportations, that could affect their operations. At the moment, companies for which this is material issue disclose it, generally using relatively high level language, and companies for whom it is not material do not. The equivalent of this SEC move would be if all companies had to report the exact number of immigrants they employed, broken down by visa category, national origin, and illegal status, for themselves, their contractors, their suppliers and their customers. This would help investors make decisions! But it would be extremely costly, and the motivation would clearly be political and an abuse of the SEC’s remit.
For me it’s hard to believe that companies will spend much more with compliance thatn what they are already spending with marketing and offsets to greenwash their reputations.
And when we implement carbon taxes / markets, they’ll need to disclose that info anyway
Sorry for being contentious, but.… Cochrane is remarkably clever in his papers, but I fail to see cleverness here. For instance, one of his main rants is about SEC’s proposing that firms disclose their carbon footprint; it’d be financially irrelevant, right? However, there’s a strong consensus among economists and institutions on the need for higher carbon prices. So it’s expected that, in the long run, carbon intensive companies will pay more for their emissions; disclosing data on emissions is all about allowing investors to manage long-term financial transition risks (due to future carbon prices).
Am I wrong about this? I don’t think so – this is often quoted by regulators and companies as one of the reasons to disclose data on emissions; ofc, talk about “social responsibility” is better for optics. But see this IGM Poll and contrast (a) the consensus that such data will allow investors to make better decisions with (b) the uncertainty that it will be positive for climate change. Does Cochrane ignore this? Unlikely, he is super smart; Cochrane himself has written about carbon prices. So maybe he just doesn’t care enough, or I didn’t fully understand his point.
If it’s a material risk risk, companies already have to disclose it as a risk factor. What makes this unusual is 1) it requires a very costly data gathering exercise 2) it opens companies up to very large legal risk about their precise methodology and 3) it is required of all companies, even if the risk is not material to them.
As an example, at least one of the economists in the poll you linked thought it would help investors make decisions, but was still a bad idea:
It might be useful to consider an analogy with the opposite political valence. Many companies in the US employ, or deal with other companies who employ, immigrants, including illegal immigrants. This causes political risk; there may be changes to immigration rules, or an increase in enforcement and deportations, that could affect their operations. At the moment, companies for which this is material issue disclose it, generally using relatively high level language, and companies for whom it is not material do not. The equivalent of this SEC move would be if all companies had to report the exact number of immigrants they employed, broken down by visa category, national origin, and illegal status, for themselves, their contractors, their suppliers and their customers. This would help investors make decisions! But it would be extremely costly, and the motivation would clearly be political and an abuse of the SEC’s remit.
For me it’s hard to believe that companies will spend much more with compliance thatn what they are already spending with marketing and offsets to greenwash their reputations. And when we implement carbon taxes / markets, they’ll need to disclose that info anyway