This report examines the relationship between corporate climate disclosures, climate initiatives, corporate emissions, and reputation risk. It explores how “cheap talk”—superficial or misleading climate commitments—affects actual corporate actions and climate-related outcomes, including emissions and reputational damage. The report introduces a deep learning algorithm, ClimateBertCTI, to quantify the level of cheap talk in climate disclosures.

Research questions

The study investigates two primary questions: how companies communicate their climate commitments and whether this cheap talk impacts corporate actions such as emission reductions or reputational risks. The focus is on the effectiveness of different climate initiatives and frameworks like the Science-Based Targets Initiative (SBTi), the Task Force on Climate-related Financial Disclosures (TCFD), and the Climate Action 100+ (CA100+).

Method for measuring firm-level climate cheap talk

The report develops a “cheap talk index” (CTI) to measure the degree of vagueness and lack of specificity in corporate climate pledges. By applying the ClimateBertCTI algorithm to annual reports, it quantifies the superficiality of climate disclosures, categorising them based on specificity and commitment.

Overview of the data

The study examines 14,618 annual reports from MSCI World Index companies between 2010 and 2020. The data includes firms’ emissions and news coverage related to environmental incidents. The analysis links cheap talk with corporate emissions and media coverage of climate-related controversies, drawing from sources such as Urgentem for emissions data and RepRisk for reputation risk assessments.

Descriptive analysis and main results

The findings show a steady increase in cheap talk across corporate climate disclosures, with the CTI rising by nearly 80% from 2010 to 2020. This increase is especially pronounced in the financial and utility sectors. The energy sector, despite reduced climate commitments, exhibited a significant rise in cheap talk.

Key insights include:

• Firms engaging in voluntary climate disclosure frameworks like the TCFD show higher levels of cheap talk. This suggests that such frameworks may not effectively promote meaningful climate action.
• Companies involved in engagement-driven initiatives like CA100+ demonstrated a reduction in cheap talk, indicating that targeted climate engagement can result in more specific climate commitments.
• Higher levels of cheap talk correlate with increased emissions and negative media coverage. Firms with superficial climate commitments tend to have higher emissions growth and face more reputational risks.
  Conclusion

The report concludes that cheap talk in climate disclosures is a significant indicator of a company’s likelihood of fulfilling its climate pledges. Voluntary initiatives, such as TCFD, are often associated with more cheap talk, while engagement-driven efforts like CA100+ show greater promise in promoting genuine climate action. Reducing cheap talk in corporate disclosures could help mitigate reputational risks and contribute to more effective climate strategies.

Recommendations

To reduce cheap talk, companies should focus on more specific, actionable climate commitments, especially when disclosing through voluntary frameworks. Investors are encouraged to engage more actively with firms, using tools like the CA100+ initiative to drive transparency and accountability. Furthermore, financial professionals should critically assess the specificity of corporate climate commitments when evaluating climate-related risks and opportunities.