- Luca Enriques, Alessandro Romano, and Andrew F. Tuch, Sustainability Assurance (ECGI Working Paper No. 871/2025)
- Luca Enriques, Alessandro Romano, and Andrew F. Tuch, Green Gatekeepers, 109 Minn. L. Rev. 609 (2024)
Even though climate-related reporting is now near-universal among the world’s largest companies, it remains one of the most contentious, politically-explosive topics in contemporary corporate regulation. Questions surrounding the materiality of climate-related risks, the value of climate-related disclosures, and the regulation of greenwashing have dominated recent scholarly attention. What is less frequently addressed is the practical mechanics of how companies assess their climate risks and then reassure others about the credibility of those assessments.
In fact, there is now a sprawling industry of people and institutions that function to vouch for the quality of climate-related reporting as well as other “green” signals sent by companies. There are obvious parallels between this industry and the traditional “gatekeepers” of corporate financial disclosures, whose failure to function as effective sentries famously contributed to the corporate scandals in the early 2000s and was a central target of the reforms introduced by the Sarbanes-Oxley Act of 2002 (“SOX”). Given the similarities, do we need a “green” SOX, and if so, what should such regulation look like?
A cogent, insightful step toward an answer to this question comes from Professors Luca Enriques, Alessandro Romano, and Andrew Tuch in their recent article, Sustainability Assurance, and an earlier companion, Green Gatekeepers. In the latter, the authors define “green gatekeepers” as entities that perform at least one of two functions: standard-setting (“specify[ing] the requirements for certification” of a sustainability-related claim) and verification (“assuring or validating that these standards have been met in any given instance”). This label broadly encompasses assurance providers, who verify a company’s sustainability disclosures; ESG ratings providers, who assess a company’s operations vis-à-vis societal and environmental factors; and net-zero target certifiers, who evaluate the credibility of a company’s strategy to transition to net-zero emissions; just to name a few examples.
Like traditional corporate gatekeepers, green gatekeepers possess reputational capital, which they lend to corporate clients by vouching for the sustainability claims made by those clients. A gatekeeper’s trustworthy reputation enables investors or consumers to regard the gatekeeper’s certification as more credible than a company’s own statements about itself. Crucially, a gatekeeper’s performance depends on the fact that its reputation is put at risk whenever it provides a certification; its reputational capital will erode if it were later found that the gatekeeper condoned an inaccurate or misleading disclosure. In situations where the expected injury to reputation would only be slight or improbable, the logic of gatekeepers comes apart.
Across Green Gatekeepers and Sustainability Assurance, the authors’ central claim is that market-based reputational constraints are less likely to discipline green gatekeepers than the traditional gatekeepers of financial markets. In other words, in the absence of regulation, green gatekeepers may not be adequately motivated to certify only truthful and substantiated claims. The authors explain this is so for three reasons.
First, investors and consumers may not be motivated to interrogate the accuracy of sustainability disclosures because they may actually derive utility from misleading or lax claims, so long as no one finds out. They may engage in “motivated reasoning,” relying on the sustainability claim and corresponding gatekeeper certification to justify a pre-existing preferred outcome (think of an investor who wish to include a certain company in her portfolio, or a consumer who wish to buy from a particular brand). Or they may derive a good feeling from the act of choosing investments or products that have been certified as sustainable, such that the certification rather than its accuracy confers the benefit. To put the point more cynically, some investors and some consumers may prefer to be unknowing recipients of greenwashing.
Second, investors and consumers may not necessarily incur private pecuniary costs from relying on deceptive sustainability claims, which further limits their incentive to monitor gatekeeper conduct. In Sustainability Assurance, the authors illustrate this concern with the example of corporate disclosures made only on the basis of impact materiality, which is required by the European Union’s Corporate Sustainability Reporting Directive and covers the risks of corporate activity on society and the environment that are financially immaterial to the company. By definition, impact-material-only disclosures carry no financial consequences for investors if the information turns out to be false, especially if investors never become aware of the falsity. “In these instances, the verification of green gatekeepers’ certifications has an exclusively public-good nature. As such, it will be undersupplied.”
Finally, even if sufficient motivation to detect wrongdoing exists, the computations underlying most sustainability certifications are characterized by a much higher degree of scientific complexity and inherent uncertainty than that processed by traditional financial gatekeepers, and therefore sustainability certifications are generally much harder to disprove. The viability of a company’s strategy to transition to net-zero emissions, for instance, depends on the choice of global emissions scenarios that meet certain temperature goals, which itself is sensitive to analytical assumptions, methodological choices, and value judgments. Complexity deters not only investors and consumers but also scientists, analysts, journalists, and other auxiliary watchdogs from effectively policing green gatekeepers; in most cases, the time and cost needed to verify a sustainability claim or certification vastly outweighs the benefits to any individual actor.
Given the breadth of green gatekeepers and their functions, the authors are careful not to suggest that reputational sanctions are inadequate to align incentives across the board. They instead argue that, “other things equal, the appropriate policy mix for various types of green gatekeepers should be a function of (1) the significance of private costs for users relying on inaccurate certifications and (2) the verifiability of green certifications by policymakers and courts, which is mainly a function of the complexity of the methodologies underlying green certifications.” Unsurprisingly, for certifications that are inherently complex and sensitive to analytical assumptions, the authors deem both ex post litigation and ex ante regulation to be unsatisfactory, and recommend adding alternative policy approaches to deter misconduct, such as mandating disclosure of the methodology used and audit reports produced by green gatekeepers or subsidizing gatekeepers that operate as non-profit entities.
I did quibble with the authors on a few minor points in the two pieces: I’m skeptical, for example, that regulators currently have the institutional capacity and resources to verify assurances of corporate climate-risk or sustainability disclosures with reasonable accuracy. Whether sustainability disclosure assurances can be trusted is a particularly relevant question now because some of the earliest jurisdictions to mandate such disclosures, New Zealand and the European Union, are now scaling back the assurance requirements attached to their respective regimes. Large companies will probably still voluntarily obtain assurance for their sustainability disclosures, but these assurances will be less robust and, crucially, less transparent.
Overall, however, Sustainability Assurance and Green Gatekeepers deliver a useful analytical framework with concrete directions for policymakers that are worth exploring. Moreover, along the way, readers are treated to rich accounts of how several industries that have largely evaded significant scrutiny operate—which, for me at least, came with some surprises. Together, the articles are a worthwhile read that sharpens our understanding of what is needed to make sustainability disclosures work.
