Professor Robert Wade responds to Gillian Tett’s article, “Alphabet soup of green standards needs a new recipe”, for the Financial Times.
“Compliance hasn’t carried much weight in the past“, letter, Financial Times, 21 January 2020
From Prof. Robert H. Wade
Gillian Tett describes the pressure on the Big Four accounting groups “to create a common framework for companies that want to report their compliance with the UN Sustainable Development Goals, including climate issues” (“Alphabet soup of green standards needs a new recipe”, January 17). She goes on to say that “if auditors agree on an easily understood framework for green accounting … this will radically enhance corporate transparency. That, in turn, will raise the pressure on top executives to act to mitigate climate change….”
Not so fast. A cautionary tale comes from what happened in the wake of the so-called East Asian financial crisis of 1997-98. Western governments led the project to build a comprehensive regime of global economic best practice standards in areas such as data dissemination, bank supervision, corporate governance and financial accounting. The IMF and the World Bank and other organizations were tasked with assessing the degree of governments’ compliance with these standards, and publishing the results. The expectation was that governments would comply in order to obtain cheaper finance, on the assumption that lenders would reward compliance and punish non-compliance.
From 1999 to end 2006 the IMF and others produced over 600 reports, covering more than 130 countries. But independent assessment suggested that the exercise had very little effect on the cost of capital or anything else, one main reason being that financial-market participants paid little attention to the compliance results.
With reference to the green accounting exercise, what is the mechanism by which we can hope that the results “will raise the pressure on top executives to act to mitigate climate change”? Transparency itself will not.
Prof Robert H Wade
Dept of International Development
London School of Economics, UK
The views expressed in this post are those of the author and in no way reflect those of the International Development LSE blog or the London School of Economics and Political Science.