DAF03 – The relevance of climate disclosures and climate policy to capital markets

Supervisors: Dr Karin Shields, Dr Devmali Perera and Dr Tomasz Wisniewski (Department of Accounting and Finance, The Open University Business School, Faculty of Business and Law).

Project Description:

Over recent years, sustainability disclosure regulations have evolved significantly, with a range of frameworks emerging to guide companies in reporting climate-related information. Significantly, in 2021, the International Sustainability Standards Board (ISSB) was created and has since launched two sustainability disclosure standards of which one, IFRS S2, deals specifically with climate-related disclosures. The EU’s Corporate Sustainability Reporting Directive (CSRD) which, since 2024, mandates the European Sustainability Reporting Standards (ESRS) is another key development. This sits amongst further voluntary sustainability disclosure frameworks, offering companies standardized guidelines for integrating climate disclosures into their annual reports. Similarly, in the United States, regulators have moved towards stricter rules for climate-related disclosures, particularly with the Securities and Exchange Commission (SEC) proposing new rules for mandatory climate risk reporting. These regulatory developments aim to improve the transparency and consistency of climate disclosures, making it easier for investors to assess the potential risks and opportunities associated with climate change. However, despite these advancements, the challenge remains of whether capital markets can appropriately account for climate-related risks.

The integration of sustainability disclosures into financial reporting is a significant challenge for both companies and investors. Eccles and Serafeim (2013) demonstrated a clear disconnect between sustainability reporting and financial communication, with companies often omitting climate-related discussions in earnings calls, despite their presence in annual reports. Although frameworks like Integrated Reporting (IR) and the Taskforce for Climate-related Financial Disclosures (TCFD) help integrate climate-related risks into financial reporting, many companies still struggle to align these disclosures with the expectations of investors. As a result, the materiality of climate-related risks may not be fully understood which could hinder capital markets’ ability to price climate-related risks accurately. Understanding how well companies incorporate climate-related data into their financial reporting, particularly under the new regulatory frameworks, will be critical in determining whether markets are ready to handle the growing importance of climate-related risk.

The degree to which investors care about climate-related risks and the effectiveness of climate disclosures in informing investment decisions is a crucial aspect of this research. Krueger et al. (2020) suggest that many investors now recognise the financial implications of climate-related risks, but there is still uncertainty about whether these risks are adequately priced into assets. For instance, Bolton and Kacperczyk (2021) found that companies with higher carbon emissions tend to have higher stock returns indicating that there is a climate risk premium. Additionally, research by Cohen et al. (2023) and Ilhan et al. (2023) shows that institutional investors who demand better climate disclosures can encourage firms to improve their reporting. However, it remains unclear whether these improved disclosures result in real changes to stock prices and further investor behaviour.

National, and international, climate policies, such as those aiming for net-zero emissions, are likely to play a critical role in shaping how firms disclose climate risks and how investors respond to those disclosures. Ilhan et al. (2023) highlight that investors in countries with stronger environmental regulations are more likely to engage with firms to demand better climate risk reporting. Faccini et al. (2023) found that while climate policy risk is reflected in US stock prices, physical risks such as natural disasters or international climate summits are not, suggesting a gap in how market participants assess climate-related risks. The way national policies, including commitments to net-zero transitions, influence investor behaviour and firm strategies is crucial to understanding how capital markets can appropriately account for climate-related risks. Therefore, we encourage proposals for research willing to explore whether climate disclosures are effectively enabling investors to price in climate-related risks and how these disclosures and reactions to them vary internationally.

The proposed PhD research aims to fill these gaps by investigating the impact of climate disclosures, the integration of climate and financial information, and the role of national climate policies in shaping market responses. The student will explore whether existing climate disclosure regulations, such as the emerging ISSB and ESRS standards, are helping firms bridge the gap between sustainability and financial reporting.

Ultimately, we strive for a thesis that will provide important insights into whether capital markets are truly equipped to handle the growing influence of climate change on financial decision-making, and whether regulatory frameworks need further refinement to ensure that climate-related risks are adequately priced.

There are several important research avenues to explore in this context, including but not limited to:

The usefulness of sustainability report information to investors.
The usefulness of integrated financial and non-financial information (including Integrated Reports) to investors.
How investors interpret climate risk and materiality.
Whether single or double materiality of climate-related disclosures result in more relevant information for investors.
How much connectivity between sustainability and financial information matters.
What combination of disclosure regulation and climate policy enable investors to price climate-related risk.
We envisage the research project to be flexible according to the interests and background of the PhD candidate. The supervisory team favours quantitative research methodologies.

Expectation:

The doctorate is expected to develop specific research questions within this area and gradually develop three working papers over the period of three years that are publishable in internationally recognised academic journals.

It is hoped that the prospective candidate will demonstrate an interest in developing both a theoretical/conceptual and empirical contribution within this field.

Applicant Expectation:

The candidate must express a keen interest in sustainability disclosure and capital market research. Prior knowledge and experience in quantitative research methodologies is required, such as a past undergraduate or postgraduate dissertation.

About the Supervisors:

Karin’s research interests are in the use of accounting and its role in facilitating efficient capital allocation. She is particularly interested in whether sustainability reporting meets the information needs of market participants in the quest for net zero emissions. Her current research examines the importance of sustainability reporting to investors and financial analysts. This builds on prior research on the role of gender in information sharing and processing as well as the development of accounting regulation in the presence of lobbying.

Devmali has published her main research examining the different financialization aspects of agricultural commodity markets, examining the insider trading in equity markets and has conducted meta-analysis studies in finance. She has published her research in high ranked peer reviewed journals such as International Review of Financial Analysis, Journal of Commodity Markets and Research in International Business and Finance and contributes as a peer reviewer for several academic journals. Her on-going research projects are leaning towards sustainable finance, fintech and financial inclusion.

Tomasz’s interests revolve around asset pricing and investment strategies. More specifically, he is interested in whether stock prices reflect available information efficiently or merely follow the behavioural tendencies of traders. In early work, he focused on informational asymmetries and the impact of insider trading on market microstructure. More recently, he has concentrated his research efforts on examining the interplay between stock markets and political developments. He has published widely in top international peer reviewed journals in finance.

References:

Bolton, P., & Kacperczyk, M. (2021). Do investors care about carbon risk?. Journal of financial economics, 142(2), 517-549.

Cohen, S., Kadach, I., & Ormazabal, G. (2023). Institutional investors, climate disclosure, and carbon emissions. Journal of Accounting and Economics, 76(2-3), 101640.

Faccini, R., Matin, R., & Skiadopoulos, G. (2023). Dissecting climate risks: Are they reflected in stock prices?. Journal of Banking & Finance, 155, 106948.

Ilhan, E., Krueger, P., Sautner, Z., & Starks, L. T. (2023). Climate risk disclosure and institutional investors. The Review of Financial Studies, 36(7), 2617-2650.

Krueger, P., Sautner, Z., & Starks, L. T. (2020). The importance of climate risks for institutional investors. The Review of financial studies, 33(3), 1067-1111.