These are the Shortfalls of the Paris Climate Change Deal

Published December 26, 2015

2015-12-26 21:31:50

The agreement is huge but there’s still a lot to do.

This year has been a milestone year for commerce and climate agreements. Two of the biggest are the Trans Pacific Partnership (TPP), and the recently completed Paris Climate Compact.

The TPP struck by the U.S. and 11 other Pacific nations defines commercial rules for two-fifths of the global economy. The Paris Climate Compact will reduce global greenhouse gas emissions, slowing the effects of climate change.

These agreements may point us in the right direction, but there is still much to be done. As U.S. companies expand their businesses abroad under these agreements, many will be operating in new political and regulatory environments, making it easier for corporations to sue governments that seek to bolster environmental, workplace safety and compliance standards. The agreements are also difficult to measure and enforce.

Indeed, it’s highly unlikely that this dilemma will be solved in the short term because individual countries are unlikely to give up their legislative autonomy. No single organization will be created to monitor environmental, labor or safety standards across the globe. While we know it takes years to incorporate meaningful regulation and performance metrics in global treaties, there is a way to get there faster.

How? Simply by demanding that global businesses comply with non-financial reporting standards.

Despite the enormous amount of financial information published by companies in annual reports financial disclosure alone fails to tell the complete story about a company’s health or its prospects for growth and success in a global economy. Reporting non-financial information provides a more complete picture that helps investors and other stakeholders better understand how value is created, managed and sustained.

Greater transparency on environmental performance, including voluntary disclosure by firms, will have a strong effect on creating change in global business practices while providing transparency on measuring global emissions reductions.  And it’s not just environmental protections that matter. Issues of corporate governance, accounting integrity and social impact are all business metrics that matter to corporate stakeholders – employees, investors, consumers and regulators alike.

Over the past 20 years, the Federal Trade Commission (FTC) has pursued action against corporations for false or misleading statements about environmental performance a mere 41 times. One could argue there needs to be more action, but it’s difficult for the government to make a case against corporations when they are not currently required to share information on non-financial practices or performance.

The TPP and the Paris Climate Compact each represent milestones in global economic and environmental progress. These agreements write the rules for global trade and environmental sustainability—rules that will help grow the American economy, all while slowing the severity of climate change. While these agreements are significant wins for everyone, they are of little value unless we can measure our progress against our goals and set new standards for global business leadership.

Vanessa C. Burbano is an assistant professor of management at Columbia Business School.

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