The Stigler Center for the Study of the Economy and the State hosted with the Rustandy Center for Social Sector Innovation, in partnership with the Financial Times, a virtual event discussing the standards, metrics and disclosures of investments focused on Environmental, Social and Governance (ESG) goals. The following is a transcript of the event.

Sebastian Burca

Hello, and greetings from Chicago. My name is Sebastian Burca, and I am the Senior Associate Director of the Stigler Center. Today we’re happy to kick off the first event in our series Unpacking ESG, which investigates the ways ESG is, is not, and could be a force for social and environmental impact. Our conversation today will focus on standards, metrics, and disclosures, and will feature Tom Gosling and Christian Leuz, moderated by Kenza Bryan.

The series features global thought leaders from Chicago and beyond who share their expert insights on some of the timeless ESG topics. And it is cosponsored by the Stigler Center and the Rustandy Center at Chicago Booth, in partnership with the Financial Times. We’re thankful to the Rustandy Center for being such a strong partner and for helping to bring this event to life. And we’re also thankful to the Financial Times, our media partner on the series; and especially to the team at FT Moral Money.

If you aren’t familiar with the Stigler Center, we are dedicated to understanding issues at the intersection of politics and the economy, and are an intellectual destination for research on regulatory capture, crony capitalism, and various forms of subversion of competition by special interest groups.

And the Rustandy Center for Social Sector Innovation celebrates 10 years as the social impact hub at Chicago Booth for people committed to tackling complex social and environmental problems. By promoting innovation, advancing faculty-driven social impact research, launching social ventures, and convening thought leaders and practitioners, the center develops the people and the practices that accelerate social change.

FT Moral Money is the destination for news and analysis on the role of business and finance in the drive for a fairer, cleaner, and more sustainable world economy. The newsletter offers sharp coverage and commentary on the debate over the purpose of business and of capitalism itself. We encourage you to check out the Stigler Center’s publication, subscribe to the Capitalisn’t podcast, as well as the Rustandy monthly, and also FT Moral Money, which publishes three times a week. The relevant links can be seen in the chat function at the bottom of your screen.

And before we begin, please note we are on the record and we will post the event video on YouTube later. If you have any questions for the speakers, please start submitting them via that q&a icon at the bottom of your screens and we will try to get to as many as possible toward the end. As usual, views expressed by guests are their own, not those of the organizers or the University of Chicago. I also want to highlight the next events in this Unpacking ESG series on June 14, on shareholder democracy; and on June 21, on whether corporate ESG is political activism. Please check out the series website for more details and to register.

Now please allow me to briefly introduce our speakers. Their full bios can be found on the event page.

Tom Gosling is an executive fellow at London Business School and the European Corporate Governance Institute. He is also on the ESG Advisory Committee at the Financial Conduct Authority and on the advisory panel of the Financial Reporting Council. Previously, he was a senior partner at PricewaterhouseCoopers, where he established and led the firm’s executive pay practice. He brings more than 20 years of experience as a board advisor and his expertise covers executive pay, investor stewardship, corporate purpose, and regulation. Tom contributes to the evidence-based practice of responsible business by connecting academic research, public policy, and corporate action, among others.

Christian Leuz is the Charles F. Pohl Distinguished Service Professor of Accounting and Finance and a co-organizer of the Clark Center “European economic experts” panel here at Booth. He is a research associate at the NBR, research fellow at the CEPR and Leibniz Institute, and also a fellow at the European Corporate Governance Institute and the Center of Financial Studies, among others. His research focuses on the role of disclosure and transparency in capital markets and other settings, the economic effects of regulation, international accounting, corporate governance, and corporate financing. His work has been published in many top academic journals, and he has received several awards and honors, including being named by Thomson Reuters as one of “The World’s Most Influential Scientific Minds” for five years in a row.

And last but not least, our moderator today is Kenza Bryan. Kenza is the Moral Money reporter at the Financial Times, where she writes about sustainable finance and business for the Moral Money newsletter. Before joining the FT, she was an investigator at the climate and anticorruption group Global Witness. She has also been a foreign and consumer reporter for The Times and Sunday Times, as well.

And now without further ado, I’ll turn it over to Kenza and our speakers, thank you.


Kenza Bryan

Thanks so much to everyone who’s tuned in, and our two panelists, Tom and Christian.

So to start with, if you thought data was a safe haven for the politicization of ESG, if you thought it was boring, think again! One metric in particular stands out for being incredibly contested and of direct relevance to the real world.

This is indirect or “scope 3” emissions, which, as you all know, make up the majority of the average company’s real-world impact. Disclosure here is patchy at best, and tough target setting is even patchier. No energy supermajor, for example, has scope 3 emission reduction targets for 2030 that are Paris-aligned.

When we talk to bankers, insurers, and asset managers about this particular metric, they tell us that they have teams of analysts working out the projected value of deals down to the last cent, but that the real-world carbon impact of these deals, assessing this, is still out of reach in most cases. On the flip side, when we interview ESG rating and data giants, they’ll tell you that everything can be measured down to the last carbon atom. In the US, of course, the Securities and Exchange Commission is examining how and whether publicly traded companies should disclose scope 3 emissions, and have met with a backlash from Republicans and some investors who say the agency is overreaching in demanding this.

So even as data disclosure rules blossom in jurisdictions like the UK, the EU, and the US, the data on the things that matter remains patchy and also remains controversial. So I think the broad question we’re trying to answer today is whether widening the evidence base for sustainability endeavors can turbocharge action by business and finance. In other words, how more transparency could be used to create more accountability; and whether, in some cases, disclosures are being used as a substitute for action.

I welcome your thoughts and questions on all of this, so do start putting them in the chat box. Without further ado, I’d like to turn to Tom to ask what the purpose and philosophy behind ESG disclosures is, and whether focusing on these could help depoliticize the space at a time of increasing backlash against the ESG project?


Tom Gosling

Well, I think that there are two quite different sets of objectives behind ESG disclosures.

There’s one that almost everyone agrees on around the world, which is this idea that corporate disclosure should give investors the information needed to assess ESG risks that affect the enterprise value of the firm. And this is a traditional, single materiality approach that underpins things like the task force for climate-related disclosures, which in various forms has been widely adopted throughout the world, and also underpins the international sustainability standards for disclosures, the SEC’s climate disclosures, and a whole load of emerging voluntary and compulsory disclosure rules in Asia and elsewhere. You sort of feel it should be possible to depoliticize this aspect of ESG data because it should be possible to get some agreement on what is material to enterprise value. And indeed, before the ESG culture wars kind of became a thing, the Sustainability Accounting Standards Board made a pretty good fist of doing this. But even here, as we’re seeing in the US, it’s not easy, given the kind of controversy that there is over the SEC’s new climate rule, which is pretty broadly supported by investors.

But there’s then a very different objective behind ESG disclosures, which is to help redirect corporate behavior to address environmental and social issues. And this leads to much more of a focus on the impact that companies have on social and environmental issues, kind of regardless, really, of whether those issues end up being financially material to the company. So, you know, human rights abuses in a company’s supply chain may or may not come back to bite them financially. But the company surely has an impact on those human rights abuses. And the philosophy here is that if we have better disclosure around these ESG issues, then we’ll have better performance from companies on these issues, and a better world.

And this sort of so called “impact materiality” approach is commonly identified with the EU approach to these sustainability disclosures, which is really explicitly intended to drive change on environmental and social matters, and is really not visible in US regulation. But really interestingly, it’s also visible in some of the guidance that’s coming out in China, which is focusing on aspects of corporate citizenship, like meeting China’s dual carbon goal and contributing to the common prosperity agenda. And I think that this shows that this dimension of ESG disclosure is impossible to depoliticize because the non-financial objectives you choose to care about are inherently political. Different countries will have different goals that they are seeking finance to pivot towards, and I think the EU and Chinese flavors of this are a good illustration. So I think, here, you need some level of political agreement within the society for which the rules are being set.


Kenza Bryan

And, Christian, I’d like to turn to you. Like Tom, you’re in some ways mostly an academic. In what ways does your research and your real-world experience tell you about whether more disclosure leads to more impact?

Christian Leuz

So let me first say that I think Tom set this up really nicely. And I largely agree with the distinctions that he made between these two different goals. I think that’s very important to keep in the back of our minds.

I want to sort of add one before we get into what the research can say about this, which is this. If we think about the financial risks perspective, that I think should, as Tom said, be largely nonpolitical. And it’s a ship that sailed a long time ago. Most of the reporting systems we have throughout the world, they’re basically based on this idea of financial materiality. In that space, we’re not capturing what would be corporate externality. So if we think about greenhouse gas emissions, or water usage, or biodiversity, or some of these corporate activities that basically affect society and have imposed costs on society, but are not very costly to the firm. They’re almost, by definition, not financially material to the firm unless society decides at some point that they want to internalize these external effects that the firm has on the environment and on society. And so it is that space where I think a lot of the politicization is taking place. But as Tom said, in that space, it is inherently political because it’s important to ask, “Who gets to decide what change we’re driving? What kind of changes do we want to see?” And in that space, disclosure has actually been used.

The US has a long tradition of using disclosure for environmental policy. So if we go back to the Toxic Release Inventory that was created to inform consumers and inform communities about the release of toxic chemicals. People call that sometimes the “third wave” environmental regulation, where in essence the idea was that by sunlighting—or targeting with transparency—certain corporate activities, we can influence these corporate activities. And this is something that I and others have contributed to and studied and looked at. To what extent, when we spotlight or expose certain corporate activities to sunlight, would that then change these corporate activities?

A high level summary of some of this evidence would say that you do get changes in corporate behavior. And you often do get changes in corporate behavior in the direction that you intended. So for instance, for greenhouse gas emissions, there’s some studies that would suggest that when we impose disclosure rules on companies to tell us about their greenhouse gas emissions, you’re getting reductions in greenhouse gas emissions around 8% to 12%. We have done this study on fracking, and the water pollution that comes with fracking. To what extent providing more transparency around the chemicals that are being used in the fracking fluids, would that change some of the corporate practices? And again, we saw effects on the order of 10% to 15%, in terms of reduction of water pollution. So in that sense, I think there’s some positive evidence out there that says disclosure regimes can work.

But there’s also evidence out there, not surprisingly, that sometimes these regimes can have unintended consequences. And so for those who want to drive change with disclosure regimes, they have to be aware that sometimes we will get unintended consequences. And these unintended consequences are connected to the way that a disclosure regime works. And the idea is, when we expose corporate behavior through a transparency regime, we’re essentially hoping for a societal response, or response from the consumers, or response from the investors that then imposes costs back on the firm. And so the issue is that these responses are sometimes very difficult to foresee. And we also don’t know whether these responses are imposing costs on firms of the level that we would like to have. And so if you take, again, the carbon space as an example, ideally, you would like to impose a carbon tax on firms. It’s not clear that the consumer response or the investor response to a carbon emission disclosure is going to be on the order of the social cost of carbon, which is what the kind of tax would be that you would want to be imposed on the firm.


Kenza Bryan

Christian, very interesting idea. Broadly, there is some link between disclosures and impact, but unintended consequences need to be watched out for.

Let’s dive straight into some of those unintended consequences, some of those specific regimes that we might have in the back of our minds.

Tom, I was hoping you could tell us a little bit about how different approaches to fund disclosure rules vary across the world. And whether they tell us anything interesting about those governments’ attitudes to the role of finance, the role of business, in transitioning the economy.

Tom Gosling

When you look at investment fund disclosure regimes around the world, there’s a bit that’s quite similar across them all, and then there’s a bit that’s different.

So we’ll start with a bit that’s similar. Maybe a common theme they all have is an aim to protect consumers against greenwashing by trying to ensure that funds, in essence, just do what they say on the tin. And that’s true of the rules in the US, the EU, the UK, and Singapore, which I think is the only Asian territory that currently has compulsory fund labeling regimes. And so all of these territories have introduced, or are introducing, specific disclosure requirements for funds that have ESG or sustainability objectives. And these include things like explaining what those objectives are, any targets you have associated with them, how you meet those objectives, and so on. And there’s a lot of overlap between these requirements across the world, although, in practice, each regulator is putting their own unique spin on things, which makes it pretty tricky for global fund managers.

And then I think the other common factor is a link with fund naming. So it’s recognized that, you know, consumers don’t always look that deeply into what a fund is actually doing, and that names actually matter. So if something is called a sustainability fund or an ESG fund, then consumers sort of infer that that fund is having some real-world impact. So all of these territories are also introducing rules about what’s required if firms are going to use words like “ESG” or “sustainability” or “climate” in their name.

Sometimes, like in Singapore, that might just trigger whether enhanced disclosure rules apply to you. But the US, EU, and UK are all trying to apply kind of minimum percentages—80% or 70% of the fund investments—that must directly reflect what is in the fund name. And that all sounds really sensible until you start getting into some of the complexities around ESG. So, if your ESG strategy is just to invest in low carbon emitters and companies with diverse boards, then it’s pretty straightforward to identify what it means to have 80% of your investments held in such companies. But what if your strategy is a tilting strategy that looks to overweight better performers and underweight worse performers but still keep them in your portfolio, to try to incentivize improvement? That no longer fits so well within that sort of a strategy.

So you sometimes find that the form of the regulation determines the products that are designed, and not always in a way that delivers real-world change.


Kenza Bryan

Tom, I was wondering whether we could quickly just focus on one jurisdiction because I’m appreciating that level of detail that you’ve been giving, particularly in the EU. If you can talk a little bit about the EU’s flagship SFTR disclosure rules and the taxonomy. There’s been a recent wave of controversy over EU fund naming, with names changing from the greenest fund to the semigreen fund and back to the greenest fund. I wonder what all of these debates tell us about how well, specifically, the EU regime is functioning, given that it’s the most active and trigger happy on disclosure regulations.

Tom Gosling

I think what’s happening in the EU can demonstrate some of these unintended consequences. I mean, I think there have clearly been teething problems.

Just very briefly, in Europe there’s a disclosure regime where funds can either be article 6, which means that you don’t have an explicit sustainability objective; you can be article 8, which means that you promote environmental and social characteristics; and you can be article 9, which means you actually have a sustainable investment objective.

And the problem was, at the beginning, people weren’t quite sure what any of these phrases meant. But they sort of instinctively felt that they wanted to be article 9 because that sounds like it’s the most sustainable and the best thing to be in, and if you’re wanting to sell investment funds, then it’s probably best to be in the top division. hen the EU started making noises about, “Well, if you’re article 9, then every investment in the fund has to be sustainable.” And a lot of fund managers got cold feet and started reclassifying funds down from article 9 to article 8. That might now reverse because the EU’s clarified that, “Well, maybe we’re going to let fund firms themselves decide what’s sustainable.” So I think there’s a lot of confusion about what “sustainable” actually means in the context of an investment, which is leading to a bit of an issue for fund managers.

And now we’ve got a another overlay in the EU, with ESMA consulting on a fund labeling regime, because this article 6, 8, and 9 was only ever meant to be a disclosure regime, but it kind of became a de facto labeling regime. So we might have a labeling regime that doesn’t exactly match up with the 6, 8, and 9. So, you know, if this was something that was meant to make stuff clearer for consumers, I think you can immediately see that it probably hasn’t worked.

And you get some very, very odd results. Because, again, embedded in the regulation is this idea of a Paris-aligned benchmark, which essentially is a sort of a benchmark index where the carbon footprint of that index, you know, reduces at a rate that is, on the face of it, consistent with the 1.5 degree target. But that decarbonization could be met from just divesting higher-emitting assets. Now, under the EU regulations, that could qualify as an article 9 fund, which consumers would reasonably think is the highest category of impact. But the reality is that that decarbonization approach, if you sell fossil fuel firms, someone else buys them, and it’s probably not having a lot of real-world impact.

So I think that’s an example where the way the regulations are written leads funds to be designed and marketed in a certain way that might be completely detached from that real-world impact. It’s very difficult to do this in a meaningful way.


Kenza Bryan

So deep! I wanted to turn to Christian and ask you to maybe take a step back and tell us, does this level of detail in regimes, was that bound to cause dysfunctions in the real world? And if you can tell us a little bit about the US, the slightly “lighter touch” approach, whether that’s yielded better results?

Christian Leuz

Let me make first one, maybe, point that I think is very important for people to understand, and that was sort of implicit in Tom’s response, which is this. Aside from this notion of truth in advertising, and making sure that when consumers invest in certain funds they know what they’re getting, I think what is important here to also understand is that when people speak about impact, that we sometimes have different things in mind in terms of what we mean by impact.

Most consumers would probably, or investors, would probably say, if it’s about impact, then it means that we’re really changing something about the environment. And a fund that solely provides some kind of divestment or does some form of screening has actually relatively little impact in the end, because what happens here is that all the trading is basically happening in secondary markets.

And so imagine that a consumer or an investor says, “I don’t want to hold certain oil and gas firms.” Or certain, you know, what people call brown stocks. And so they divest from this. Unless this group is really, really large, they’re not going to have a very big impact on the price of those brown stocks, because there are other investors out there that don’t necessarily share these preferences, and they will happily buy the stock when the people with green preferences or certain ESG preferences are selling these stocks. And then that, in turn, sort of mitigates the impact that it will have on price, and therefore doesn’t really do much in terms of raising the cost of capital for the brown firms, or therefore forcing them to change their behavior in some meaningful way.

And so that’s why I think it’s important to look where investment—and by that I mean directly capital—gets directed towards green projects, or projects that would help with decarbonization, and so on. To make that distinction, so that consumers can say, “Well, for reasons, like, my preferences, I just want to hold certain stocks, and I don’t want to hold other stocks.” Are they really getting something that maybe helps address some of these externalities, that helps addressing the environmental and social issues that we face? And so in my mind that is a key distinction that needs to be made.

And the US regulation—and that’s getting to your question—is basically trying to make that distinction. The US is just creating three different fund categories. And one of the fund categories, that in essence is going to be the smallest one, is actually the one where there is this notion of real-impact investing, where the capital gets directed towards projects that would have a green impact. And I think the principle difference between the EU perspective and the US perspective is that, as you said, the US is sort of lighter touch and relies much more heavily on the notion of, “We’re going to just provide information. We’re going to make sure that the funds get labeled in the right way, that investors can make their choices and have proper information.” Whereas the EU has, again, this idea, “We’re going to drive change.” And that’s why the fund disclosure regime is tied to the EU taxonomy, which then in itself has basically this idea of directing activities towards things that would help with decarbonization, and it would help with the EU, sort of, green agenda.


Kenza Bryan

Okay, so we’ve talked a little bit about different approaches to fund regulation. Again, trying to stick as much as possible to real-world impacts. I wondered if you could talk, maybe first Tom, on the climate side, where are we at in terms of scope 3 and carbon related disclosures? What is the quality of disclosures right now? And why does that matter?

And then maybe Christian, if this is something you’re interested in, you could tell us after that, a little bit similar question, but for biodiversity data, and the quantification of nature risks.

Christian Leuz

I actually have strong views on scope 3, so I’d love to actually also talk about scope 3. But Tom, you go first.

Kenza Bryan

Great, okay. Well, Tom, you go first, and then you can maybe both talk about that?

Tom Gosling

Sure, yeah. Look, scope 3 is both important and difficult. And I think both the SEC and the ISSB have recognized that scope 3 emissions, at least in certain cases, are really important to understand a firm’s climate impact.

But there are massive problems with reliable measurement. And I think almost everybody agrees there’s scope 3 disclosures that, as they currently stand today, are barely worth the paper they’re written on. There are then two schools of thought. One is, “Therefore, we should just ignore them; they’re a waste of time.” The other is, “Well, it’s too important an issue for us to ignore; therefore, we’ve got to start disclosing them, and then learn how to do it better in the future.” But I mean, there are some really, really fundamental problems with scope 3, and whether changes in scope 3 really represent changes in carbon emissions.

To give a really simple example. If I redesign an appliance to be more energy efficient when it’s used by a customer, then I can probably legitimately claim that I’ve immediately reduced scope 3 emissions, provided it doesn’t result in the consumer using it more.

But what if I change my raw materials? For example, from virgin to recycled wood? On the face of it, that recycled wood should have a lower carbon footprint. But in the short term, I’m not actually changing the amount of these materials in the market, I’m just meaning that somebody else is moving to use virgin materials instead of recycled.

Now, if everybody really cares about it, and we get an overall change in the market, we may in future get more recycled materials and lower carbon emissions. But at least in the short term, all we’re doing is shifting carbon emissions around between each other.

Because of the latitude about how scope 3 emissions are reported, it can seem like everybody’s reducing their scope 3 emissions, when actually we’re just passing it around and not making any difference. So there is some real fundamental problems about how reliable this information is ever going to be.

Kenza Bryan

I’m not sure I understand how changing the input materials for this theoretical product would affect…

All right, so you’re talking here, maybe you should break down the two different types of scope 3 emissions?

Tom Gosling

You’ve got scope 3 emissions that relate to your supply chain inputs. And then you’ve got scope 3 emissions that relate to how users use your product.

And so the first example I gave around energy efficiency was the latter case, of how people use the product. But if you look at scope 3 input emissions, then the source of your input woods to your furniture, or whatever it is that you’re making, will affect your scope 3 emissions through that dimension as well.

Virgin wood will have a higher carbon footprint than recycled wood. The question is whether, by switching from virgin to recycled, I’m actually making any aggregate change to the consumption of those two types of wood. Now, I may be or may not be. I really don’t know. I’m certainly not immediately making that change. If I am making that change, it’s a sort of a long-term market signal I’m sending that, at some point in the future, may change the market equilibrium between virgin or recycled. But the problem is I don’t really know.

And then we have this problem that, sometimes, scope 3 emissions are based on the embedded lifetime emissions of the product that’s in your supply chain. In other cases, it’s just based on an annual flow rate of emissions from your suppliers.

So because of this kind of degree of latitude, and flexibility, and lack of comparability around how scope 3 emissions are calculated, we can create the appearance of making progress on scope 3 emissions reductions without actually having any real-world impact at all. So I think they’d come with a massive health warning. I think they’re a useful check. I personally don’t think they should be ignored. But we have to be acutely aware of their limitations.

Kenza Bryan

It seems to me there, Tom, that you were also raising a broader question about whether an individual company or consumer changing their production or consumption habits has any impact on the wider ecosystem. And now that’s a much broader question beyond just scope 3.

Tom Gosling

It is a broader question. But it is reflected in how scope 3 is reported.

And so this then comes back to, how do we interpret that scope 3 number? Do we interpret a reduction in scope 3 as genuinely a reduction in emissions? In some cases it is. In other cases, it’s a statement of good intent by a company, which if everybody did the same thing would lead to a reduction in emissions. And I think they’re quite different things. But it’s not always understood that they’re different.

Christian Leuz

Okay, I think there’s also two more issues that I would bring up. I mean, there’s sort of this lack of data and data infrastructure that Tom has already talked about. But to give a simple example, if you think about the average car manufacturer that has thousands of suppliers, then you would basically need the scope 3 information for all their thousands of suppliers, some of which sit several links up on the chain in the supply chain. So this is sort of a massive undertaking.

But on top of that, I think there is this issue that, to what extent does, actually, the firm that reports the scope 3 emissions even control these emissions? I think what a lot of people have in mind—and you said this in your opening remarks—is that the majority of the emissions are with the scope 3 emissions. And I think a lot of people have in mind, that’s the oil and gas firms where the fuel eventually, the fossil fuel gets burned, and therefore gets turned into CO2. And I think there it might…

Kenza Bryan

That was for the average company, rather than the majority of emissions for each company.

Christian Leuz

Yes, but if you think about an airline, right? For an airline, the biggest emissions would not be the scope 3 emissions. They would actually be the scope 1 emissions that they produce when they’re flying their planes.

And so in my mind, the other big issue, aside from with the data, is basically a control issue. Like, who actually controls, in the end, how the emissions come about? And for some of the downstream use, the firm will often have relatively little control how their product exactly gets used. And therefore, it not only makes the estimation difficult; but it also, in my mind, makes the argument that they’re accountable for these submissions, makes that argument harder. And therefore, we’re not necessarily going to get the behavioral responses that were maybe intending with the scope 3 emissions.

And then on top of that, you have a massive double-counting issue that also has to be seen. Imagine you have a supply chain of five firms. The scope 1 emissions from the firm that sits at the very top of this supply chain essentially will get counted by every single one of the downstream firms as a scope 3, upstream emission. So there’s going to be massive double counting, and you can’t add up all these emissions and then say, “Well, do they add up to the global emissions that we’re seeing by all the corporate sector?”


Kenza Bryan

That was a fascinating overview from both of you on some of the problems with the current model.

Do you have a kind of quick-fire idea, each of you, about solutions? And what would be the best way to regulate, specifically, carbon disclosures?

Christian Leuz

I would have two.

I would say, first, I would make—because of the issues with scope 3—my sense would be, “Keep it simple.” Ask everybody to provide scope 1 emissions—so, the direct emissions from the entity—and do this broadly by all entities. Not just the publicly traded firms on which most of the regulation focuses, especially in the US. Include the private companies. Include state-owned entities. And basically get the scope 1 emissions because then we also have this added, sort of, additive property, that we can add all these emissions up to get a sense for whether the emissions of the corporate sector as a whole are going down.

And then the second thing I would do, if we really want to talk about the scope 3 type of emissions because we want to inform the consumer what goes into a product, then to me this is not about entity-level disclosure. This should be about product disclosure. And here, we should then work towards a system that works kind of like a value-added tax, where essentially everybody passes their emissions on to the next chain, and then gets a credit for the emissions that they’ve sort of passed on. So then we’re not double counting. And we, in the end, could actually almost have like a label on the product, you know, be it a car, be it whatever you buy, and say, “This is how much CO2 went into this product.”

Now, this requires a public infrastructure. But having everybody figure out their scope 1 would be a critical input and a first step to make such a system work.

Kenza Bryan

Okay. Well, you know what? If you don’t mind, Tom, I think we’re going to move straight to questions. Because, I mean, those were two very interesting solutions. And I want to give the audience a bit of time to get involved. We’ve got loads and loads of questions already. I’m just going to look at the ones on carbon, seeing as we are on that topic.


One question, the most recent one that’s been asked is, “What are the panelists’ thoughts on scope 1 and 2 reductions through things like global energy credits and offsets? What’s the most effective way to reduce emissions that is actually impactful?”

Maybe, Tom, you could talk about that?

Tom Gosling

I think renewable energy credits are not an effective way to reduce emissions because they generally just result in emissions reductions that were happening anyway—through decarbonization of the grid—being kind of passed around.

So I think they’re a great example of how you can reduce scope 2 emissions without really achieving very much. And in fact, there’s some disturbing evidence that actually quite a lot of scope 2 emissions today had come through that channel.

Undoubtedly, the protocols around scope 1 and 2 reductions need to be based on real, sustainable, own firm carbon emissions around core processes and core energy sources. Rather than just, you know, shuffling deck chairs.


Kenza Bryan

And Christian, or either of you if either of you’ve studied or have a particular interest in regulatory capture, which I understand the Stigler Center does focus on. Someone here has asked, “Sometimes it’s hard to escape the conclusion that there are regulatory capture type dynamics playing out here. For example, with firms essentially obtaining a free government-certified labeling scheme through SFDR allowing them to sell more ESG funds, even though the EU has effectively not reached any of its stated goals, like stopping greenwashing. Is there some form of regulatory capture at play here?”

Christian Leuz

The question is a good one. And I think that it is fundamentally, the concern with the taxonomy is that, as we said in the beginning, you know, directing behavior in a democracy is fundamentally a democratic and a political process. And so in that sense, the EU taxonomy is created through a political process. If you think about what you would like to have, in terms of saving the planet and addressing environmental and social problems, then you would, ideally of course, have something that is based on what is truly green, that requires a significant sort of technical and scientific expertise. And these assessments will also constantly change.

The two big concerns with the EU taxonomy, in my mind, would be that it is a fairly, you know, it’s established through a political process. Therefore, you will get these influences. Whether the taxonomy is already captured or not is not something that I would be able to say at this point. But the concern that there’s going to be this influence is clearly going to be relevant and there.

Then secondly, the concern is that, because these political processes are also slow and they always involve compromises, they’re basically going to stifle innovation and they’re not going to be quick enough to be adjusted. And this is a space where I think, aside from reducing our carbon emissions, the big changes could come through innovation, through figuring out stuff that we at the moment cannot do yet. And I worry that the EU’s approach with the taxonomy, while well-intended, is perhaps sort of backfiring on the innovation side, if we’re creating a system that is just too inflexible and too slow.


Kenza Bryan

Tom, can you talk a bit about the social and governance side of things? Not just to be loyal to the acronym, but because we haven’t talked about it enough, and warming is not the only thing we need to worry about.


Tom Gosling

Governance, to some degree, we can put to one side because it’s an issue that’s already kind of pretty well dealt with through investor company dialogue.

Social is interesting because, again, it takes you straight back into the political realm. Because I think, whilst on many environmental issues there’s at least a pretty solid scientific consensus, on a lot of social issues there’s kind of not, you know? “What’s the optimal level of inequality in a society,” for example, is a subject on which you could organize a multiday academic symposium without getting any firm conclusions on it. So I think it’s still, we’re still really, really early days on the social dimension.

I think that some of the problems that Christian outlined around the EU taxonomy will just get bigger as some of these different dimensions get brought in. And they will get yet more controversial. And I think this leads us to kind of a really big issue in all of this, which is maybe a little bit related to the regulatory capture.

On a lot of these issues, we know what we need to do. And we’re devoting a lot of time, coming up with ever more detailed disclosure requirements in the hope that that’s going to massively change behavior. As Christian described early on, I mean, it will change behavior maybe at the margin, but it’s not going to have a first-order effect on some of these big externalities that exist. So I worry that we’re involved in a kind of a big distraction exercise here, involving loads of resources on getting to ever greater levels of detail on something that, fundamentally, is going to be like bringing a pea shooter to a gunfight on some of these issues.


Kenza Bryan

There’s a question that relates to that, in a way. It’s asking about, or rather, in fact this is just like a live event, you get questions that are statements. But I think the statement is interesting enough to read out. “Data and data infrastructure are a significant issue in African countries. There are other priorities, like reducing poverty. A one-size approach is not expedient.”

And the question I get from that is, should the international community be directing finance towards improving data infrastructure in developing countries, or simply towards helping them phase out fossil fuels? And all the kinds of JET-IPs we saw at the last COP, for example. Those public-private finance initiatives?

Christian Leuz

I mean, I think you are sort of almost already giving the answer with the question. It is a fair question and, like Tom was saying, a big concern is that we’re spending fairly significant amounts on this data infrastructure and disclosure. Could this funding be better spent directly on projects that would have direct impact? Some blended finance that would subsidize green investments, or address real societal issues? Especially, say, in Africa, where it’s not clear for those societies that they should be spending a huge amount of their resources that are pretty limited to begin with on the data infrastructure.

Now, we should recognize that there is a little bit of a trade-off, in the sense that almost all of the solutions that we have in store—for the climate problem, biodiversity, and so on—will often require that we have some solid data. That we can study these things. That we have information. So the investment into the data and into transparency are well taken. But I think we have to guard very carefully that that then does not become, “Because we were doing this, we’re now no longer doing the other investments that really need to happen.”

We cannot solve the climate problem, or the biggest societal problems like inequality and so on, with disclosure. But disclosure needs to be a stepping stone. It’s a foundation. It’s a bedrock of a system. Maybe, for instance, carbon markets, and so on. But then we ultimately need to put these other regimes in place if we want to see some real action.


Kenza Bryan

And a quick break from the really meaty questions. We’ve had a few people asking, like, how can they educate themselves better about this? What kind of resources would you recommend, both of you,

specifically about ESG and disclosures?

Christian Leuz

First, you can give a plug to the Rustandy Center. They’re putting on a number of events on this. Stigler has also had series on ESG. So, you know, the university is putting this out.

There’s a lot of material coming from the various information intermediaries. So there is some really good pieces that you can find from the audit firms or from the rating firms that provide, sometimes, pieces that are relatively easy to read and digest.

So those are good places to start, in terms of reading up on this. Along with the media that obviously covers this topic very extensively, and often in good depth.


Kenza Bryan

Tom, a very quick idea from you?

Tom Gosling

Yeah, I’d actually agree. I think rating agencies, organizations like Morningstar, have very good information on this. Law firms. Audit firms.

I mean, what you don’t want to do is read the original legislation until you’ve got some idea about what it’s trying to do, because your head would explode.


Kenza Bryan

And obviously, I would say investigative journalism, not only from the FT, but also the Journal, the New York Times, Bloomberg, to really make sure you’re kind of getting underneath what’s being said, as well as academic papers from universities like Chicago.

Okay, so we have 10 minutes left. Keep the questions coming!

We’ve got a question about electric cars, whether the transition to electric cars “will contribute to improvements in climate change across the entire value chain. Is there any actual research to demonstrate that it will or won’t? And if it won’t, why are governments driving consumers and society towards it?”

Tom Gosling

I’m happy to have a go at that, but I’ll also pivot it back onto the disclosure topic of today.

I think that there’s pretty good evidence that, done right, the pivot to electric cars will help with decarbonization. But it absolutely depends on where and how batteries are produced, and, in a way, it comes down to this scope 3 kind of question because, if you’ve got batteries produced by coal-fired electricity in China, that’s not going to be great. If they’re produced by renewable energy in China, then that’s going to be fantastic, and the sums are going to add up.

But coming back to the disclosure point, I think the pivot to electric cars is not being caused by detailed disclosure amongst car manufacturers about their carbon emissions and transition plans. It’s because various territories have said, “We are not going to allow the sale of internal combustion engine cars after a certain date in the future,” whether 2035 or whatever that date is. And from there, the market has figured it out.

That’s a great example about how we know what we need to do, we can just do it directly, and we don’t necessarily need a whole bunch of disclosure to tell us that that’s what we need to do. And if we think about the five most important things that we need to do on climate and biodiversity, I think we kind of know what they are, and we can just get on and do them. And actually, I don’t think we do need a whole load of information to tell us about what it is that we need to focus on.


Kenza Bryan

So regulation of the real economy there, rather than endless data disclosures.

I think this could be an interesting question for Christian. “How would you incorporate these ideas into formal accounting curriculum?” So, someone who’s written in as an “accounting educator,” which I guess means teacher or professor. “It seems to me that interesting topics like this, illustrating the role accountants can play as a vital part of the conversation, can help drive interest in the profession.”

Christian Leuz

I think it’s a great question, and something that we actually, here at Booth, have thought quite a bit about, as have many other universities.

So, last quarter I actually did develop a new class for the curriculum that is on ESG issues. It was called “Navigating the ESG Landscape.” And it took the students from understanding some of the broader issues that, for instance, Tom laid out in the beginning, understanding why we’re doing ESG reporting. How does this connect to the firm’s objective, what are some of the key issues? The concept of externalities is very central here. And then we would link this up also with issues of, what are some of the remedies? Like, the investing side of things. What are the return expectations for ESG funds versus non ESG funds? And we would talk about the various disclosure regimes as well. And then what firms can also do internally when they want to drive sustainability, have sustainability as a strategy. What internal changes might they have to do to their governance and the way they run the firm?

It was a really fun class. I learned a ton preparing it. We have some more classes in this space. There is an impact investing class that we developed already two years ago, I believe. And so there’s a lot happening in this space. And there’s a lot of cases that are being written.


Kenza Bryan

I suppose that question could have been applied to the economics profession, to law, to anything really.

There’s a related question. “What are both of your opinions about state governors and legislatures passing laws prohibiting teaching about or using ESG info or data in education or decision-making?”

So, the politics around the flow of ESG learning and information. Tom, do you have any views on that?

Tom Gosling

Well, it’s kind of mad. I mean, it’s kind of worrying.

There should be parts of this that we can all agree on. Of course, for many firms, environmental and social issues are clearly material to their ability to create value. And we should be able to all agree on that, and to recognize that they’re legitimate causes to study. Trying to shut that debate down, I think, is really damaging.

But also, I think Christian used the phrase earlier, the ship sailed on this anyway. Investors are going to use this information that is financially material, and I think the politicization of what gets taught is alarming.


Kenza Bryan

Yeah, and there’s a question I didn’t get time to ask earlier but I think would be worth addressing, about these giant ESG rating agencies that are increasingly powerful. And it’s kind of the opposite end of the political spectrum.

So, the jurisdictions that actually want to make sure that ESG is being done well, why do you think regulators want to bring these ESG companies under their remit?

Christian Leuz

They’re important gatekeepers. Right? And I think it’s a fair question, to ask who monitors the monitor. And in that sense, I can see why the regulators are saying, “We’re having oversight when it comes to credit rating agencies, we’ll have oversight when it comes to the auditors.” If there’s now this new ESG space, and it’s being used to direct capital in significant ways, to understand, you know, sort of have a sense for those gatekeepers, and have some oversight over those gatekeepers. That is, I think, what’s behind this.

And I think it’s consistent with what we have done with other information intermediaries. That’s sort of how I would rationalize or understand why there’s this intention to bring them under their remit.

Kenza Bryan

And Tom, other than this almost philosophical idea that those who control information should be under the remit of regulators. Are there any specific distortions that the rating agencies and ESG data companies have introduced into the space, do you think, inadvertently or on purpose?

Tom Gosling

Yeah, I don’t think I’d put it at the door of the rating agencies. But there is a question about how people use ratings. If people use ratings as somehow signifying a clear and unambiguous answer about what is and isn’t good ESG, then we’re going to get unintended consequences.

Because this is an evolving area, rating agencies disagree. Because there are different ways of measuring ESG, it means different things to different people. So I think the problem is actually coming down to how the ratings are being used as much as anything else.

Whilst it’s fair for regulators to get involved with ESG rating agencies, I think it’s really important that we let the market develop here, and that we don’t seek to impose premature standardization on what is really an evolving and nascent field. We’ve got to let the market decide what information is useful to users.

Christian Leuz

And given how much there is, in this space, still learning going on, it is important to, exactly, let these forces play out.

I think there’s a lot of, at the moment, debate over the fact that you can find ratings for a company where the company gets a top rating, and then you can find another rating where the company gets a rating towards the bottom. And people sort of view this as evidence of saying, “Look, there’s a huge problem with these ratings.” And to some extent, there are problems. As Tom said, this is a new and an early space. But for instance, we wouldn’t think that, when some analysts provide a “buy” rating for a stock, and another analyst thinks it should be a “sell,” and they have divergence in opinions, we wouldn’t think that that’s a problem with the analysts space, either. So in some sense, I think this sort of disagreement of the rating agencies is a little bit overplayed because they have different methodologies. They use different data. And given how difficult measurement in this space is, evaluating what truly is good ESGR, I think it’s good to allow that divergence, or have this sort of heterogeneity in the space.

What we just have to be, again, careful about is that people understand. That they don’t think that they can use that signal without further understanding what’s behind it in a methodology. And that people have sort of a more sophisticated understanding of the limitations of these ratings.

We had exactly the same debate, by the way, about maybe 10, 15 years ago with governance ratings, when the various proxy advisors were starting to rate the governance of companies. And it was a similar kind of issue, in terms of the governance ratings being somewhat all over the place. And then over time, we learned, and we’ve converged a little bit.

I think that’s a process that has to play out in this space, too.


Kenza Bryan

Thank you for that question.

And I wanted to end with a very quick answer from Tom on AI, and how this might affect the space. And whether even greater transparency about disclosures, even bigger pipelines of data, can be a force for good.

Tom Gosling

I think this is really interesting. And just very briefly, I think there are two particularly interesting respects.

One is just the ability to make sense of the vast amount of disclosed data that’s out there, potentially across different regimes that aren’t quite consistent. I think you can see AI tools really helping with the agglomeration and standardization of that information.

But I’m also really excited by novel datasets. So in areas like, for example, methane leakage from oil and gas companies, but also biodiversity impacts. We’ve now got satellite and other data, which is totally independent of what anybody’s reporting, but which is actually giving a much more accurate picture of what is really going on on the ground. So I think there is some really exciting potential data sources that give real time information about what is actually happening on the ground in a lot of these issues that will be much more usable than some of what is coming out from more traditional forms of corporate disclosure.


Kenza Bryan

That’s fascinating and hopeful. Thank you very much, both of you.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.