2022 Articles

Mandatory Corporate Climate Disclosures

Armour, John; Enriques, Luca; Wetzer, Thom

Mitigating the worst consequences of climate change by transitioning to a net-zero economy requires investment on a large scale. Directly pricing emissions, the first-best solution to drive capital reallocation, is considered politically infeasible—so policymakers put their currency in facilitating the pricing of climate risk by investors. Yet investors, faced with scientific and policy uncertainty around climate risks compounded by a lack of information about companies’ exposures, struggle to do just that. This Article shows that current disclosure policies do not require companies to disclose the information that investors need to price climate risk, and voluntary frameworks like the Task Force on Climate-related Financial Disclosures—important as they are—have failed to turn the tide. The result is mispricing and a misallocation of capital, which harms investors and hampers the net-zero transition. Against that context, this Article argues that traditional securities regulation rationales and net-zero imperatives call for mandatory corporate climate disclosures. To create a yardstick against which governments’ proposals can be evaluated, both to support their efforts and to call out policy greenwashing, this Article outlines several design principles that go beyond the emerging consensus and cover the regulatory architecture that supports such a disclosure regime.