Climate Change and Corporations

Ultimately, when it comes to corporations, incentives seem to matter a whole lot, with one key incentive being the profitability (or avoidance of loss) of any action to shareholders. In his column in the New York Times, Paul Krugman notes:

Action on climate, if it happens, will take the form of “cap and trade”: businesses won’t be told what to produce or how, but they will have to buy permits to cover their emissions of carbon dioxide and other greenhouse gases. So they’ll be able to increase their profits if they can burn less carbon — and there’s every reason to believe that they’ll be clever and creative about finding ways to do just that.

The last sentence dangles a carrot to induce companies to act in an environment-friendly manner. This approach is similar to that adopted by commentators to encourage corporate social responsibility, not as a cause on its own, but with a view to ultimately rewarding shareholders (through better public relations, enhancement in reputation and so on that translates into better profitability). The “bottom of the pyramid” approach propounded by C.K. Prahalad proceeds on similar lines. All these continue to appeal to incentives of shareholders (and consequently managers) of companies.

In this approach, though, transparency through disclosure of climate change impact information to shareholders becomes crucial as that determines stock price in efficient markets. Here is a call I made some time ago for mandatory climate change disclosures in the Indian context, which continues to go largely unheeded, but one that is worth reconsidering given that climate change is the flavour of the month.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • Absolutely true! However, as much as I am a fan of disclosure, I am aware that it has several limitations. Disclosure based regulation assumes the presence of either a regulator who will read and respond to the disclosed information or, the presence of an active civil society (perhaps consumers) that can play such a role.
    In the absence of either, disclosure will become symbolic. Alongside disclosure regulation is the requirement that civil society and regulatory capacity to comprehend, use and monitor the information be enhanced.

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