The Net-Zero Ledger: Accountability and Regulation of Corporate Climate Pledges

Since the adoption of the Paris Agreement, thousands of large companies worldwide have committed to transitioning their businesses to net-zero greenhouse gas emissions to help mitigate climate change. The momentum of these transformative, albeit voluntary commitments precipitated the creation of a de facto business standard largely governed by self-regulation. However, as “net zero” lacks a clear definition and the decarbonization pathway for many sectors and companies remains unclear, the meaningfulness of these commitments has been repeatedly questioned by stakeholders and investors alike.
Corporate net-zero commitments now face increasing regulatory scrutiny. Regulatory initiatives, from the U.S. Securities and Exchange Commission’s (SEC) climate disclosure rules or the International Sustainability Standards Board (ISSB), aim to give investors decision-useful information. They introduce specific disclosure requirements for companies with climate-related targets and transition plans. The analysis of these requirements shows that, despite critical differences in the regulatory approaches (double materiality, etc.) there is significant consistency among rules adopted by the United States, the European Union and the ISSB when it comes to requiring transparency from firms on their climate targets. Yet, all regulatory initiatives fall short of guaranteeing consistent, comparable, and reliable information to investors as they mostly require the provision of backward-looking, non-financial disclosures, often in the form of narratives. The paper similarly demonstrates the significant implementation and enforcement challenges faced by the European Union’s Corporate Sustainability Due Diligence Directive mandating the largest companies to have net-zero transition plans.
The legal analysis exposes discrepancies between climate-related reporting and financial reporting among companies that have committed to net-zero emissions. These discrepancies reveal a glaring loophole, as the law does not impose consistent disclosures between financial matters and climate-related or more broadly sustainability matters. In other words, firms can be trumpeting their climate commitments while saying—and doing—something entirely different in their financials.
To close this loophole and address the limits of new climate reporting regimes, this paper proposes the establishment of a regulatory framework requiring the proper alignment of non-financial and financial disclosures, dubbed the Net-Zero Ledger. It will compel businesses to evidence the integration of their climate pledges into their financial planning, strategy, and accounting. Concrete recommendations to regulators are made to establish this Net-Zero Ledger, on the basis of existing best practices. Accordingly, regulators would require firms to spell out in details the effects of climate commitments on, for instance, financial estimates and assumptions, asset impairments, and fair value measurements. Changes in accounting standards would not be required, although such changes would further enhance transparency and legal certainty. Implementing these new rules will be the responsibility of Chief Financial Officers and accountants, under the supervision of auditors and regulators. This new regulatory structure is necessary to ensure both the accuracy and transparency of corporate disclosures and the meaningfulness of corporate net-zero commitments.