Corporations are cooking the books – and our environment | Opinion

Imagine visiting a doctor who gives you a clean bill of health, only to call weeks later saying the test results actually showed a problem. Then, imagine they did the very same thing again on the next visit? You’d probably start looking for a new doctor.

That is the scenario that Americans face when it comes to corporate climate data.

When investors pour billions into sustainable funds, when policymakers craft climate regulations and when consumers choose where to shop based on environmental concerns, they all assume corporate emissions data is accurate. But new research from Harvard Business School reveals a troubling reality: That assumption is fundamentally flawed.

An analysis of emissions disclosures filed by S&P 500 companies over a decade found that 74% of firms revised their reported greenhouse gas emissions at least once. This isn't a minor accounting adjustment. We're talking about 135 million tons of underreported emissions ‒ more than the entire annual emissions of Venezuela, Nigeria, Qatar or Kuwait in 2020.

To put it bluntly, we are operating in a world without actionable corporate climate data.

The investor's dilemma on corporate climate data

While the revisions themselves do not necessarily mean that firms are deliberately misleading stakeholders ‒ in fact, ubiquitous revisions may signal that many companies are committed to accurate public disclosure ‒ there is a tie to executive compensation.

The analysis shows a correlation ‒ but not a definitive link ‒ between executive compensation tied to emissions goals and revisions to emissions data. When companies add a sustainability incentive to executive compensation, firms are more likely to revise emissions. Furthermore, this situation tends to manifest more often at firms where governance is problematic.

Whatever the reason for revisions, the implications to markets and those who care about the environment are severe.

For example, this level of inaccuracy represents a crisis of information for investors: 89% of investors now consider environmental, social and governance factors when making allocation decisions. ESG-focused institutional investments are projected to reach $33.9 trillion globally by 2026, nearly double the $18.4 trillion in 2021.

These aren't trivial portfolio adjustments ‒ they're fundamental shifts in how capital flows through the global economy.

But what happens when the data underpinning these trillion dollar decisions are unreliable? Investors comparing Company A's emissions trajectory with Company B's are essentially making choices based on numbers that may be revised ‒ sometimes dramatically ‒ in subsequent years. The California Public Employees' Retirement System (CalPERS), the nation's largest public pension fund, has committed to moving its entire portfolio to net-zero carbon emissions. How can such ambitious goals be achieved when the measurements keep shifting?

Unlike financial restatements, which occur in only about 3% of public companies annually and require detailed disclosures to the Securities and Exchange Commission, emissions revisions happen with alarming frequency and minimal explanation. Companies often bury changes in footnotes or omit them entirely. This isn't just an inconvenience. It is a fundamental market failure that prevents accurate risk assessment.

In the case of lenders, for example, unreliable emissions data creates exposure they may not even recognize. Climate risk is increasingly understood as financial risk. Banks and other financial institutions are developing sophisticated models to assess climate-related credit risk, determine lending terms and manage portfolio exposure to carbon-intensive industries. But these models are only as good as the data feeding them.

When a company's reported emissions can shift by millions of tons in retrospective revisions, how can lenders accurately price climate risk into their loan agreements? The answer is that they can't, at least not with confidence.

Policymakers navigate in the dark on global warming

Policymakers face perhaps the most consequential challenge. Effective climate policy requires understanding where emissions come from, how they're changing and whether corporate commitments are translating into real reductions. Without reliable data, policymakers are essentially flying blind.

The lack of federal emissions disclosure requirements following the Trump administration’s move away from SEC climate rules has created a regulatory vacuum. There is no federal law requiring companies to report greenhouse gas emissions, no widespread standard for disclosure and little accountability when data is incorrect.

States like California are stepping in with their own laws, but this creates a complex regulatory patchwork without necessarily solving the underlying data quality problem.

We cannot evaluate whether regulatory initiatives are effective if emissions are not measured accurately in the first place.

Stakeholders deserve better from corporate climate data

Beyond investors, lenders and policymakers, there's a broader ecosystem of stakeholders who depend on accurate emissions data. Employees, particularly younger workers, increasingly want to work for companies with genuine environmental commitments. Consumers make purchasing decisions based on sustainability claims. Communities assess local environmental impacts. Supply chain partners evaluate each other’s environmental impact.

All of these stakeholders are making decisions based on data that research shows are frequently revised and often understated. This is about more than numbers on a page. It is about trust.

When companies make pledges to achieve net-zero emissions or reduce their carbon footprint by specific percentages, those commitments ring hollow if the underlying measurements are unreliable.

The voluntary reporting system clearly isn't working. Assurances from third parties have not improved accuracy. Market pressure alone hasn't been sufficient. What we need is mandatory, standardized reporting with real accountability, regulations with teeth that create meaningful consequences for inaccurate disclosure ‒ much as we have for corporate financial disclosure at the SEC.

Until that happens, investors should be cautious and assume that underreporting is possible. Lenders should build larger margins of error into their climate risk models. Policymakers should prioritize improving measurement standards and enforcement. And all stakeholders should demand better because the stakes are too high to accept anything less than accurate data.

Lauren Cohen and Ethan Rouen are professors at Harvard Business School. Kunal Sachdeva is a professor at the University of Michigan. Their research on corporate disclosure data was published byNature Climate Change and Harvard’sInstitute for Business in Global Society.