From Lemons to Lemonade: Why We Need to Squeeze Better Info Out of Companies Today

It’s a bitter truth: Society has been built upon markets and financial systems that are married to short-term returns — and largely divorced from their long-term social, environmental and economic impacts. 

As economists George Akerlof, Michael Spence and Joseph Stiglitz assert in their paper titled “The Market for Lemons,” we live in a world of asymmetric information where buyers and sellers operate with different sets and levels of data to inform decisions — a phenomenon that poses existential risks to societal, environmental and economic systems. In their example of a used car market — sellers have more information about the quality of cars than buyers. This information asymmetry led to poor selection, where only low-quality cars — or lemons — remained in the market and sellers of high-quality used cars were driven away. 

Asymmetric information creates instability that influences outcomes of economic exchanges, market efficiency, resource allocation — and, ultimately, disguises risks to the social, environmental and economic systems that we rely upon. To protect and preserve these systems, we need to be able to differentiate lemons — and understand the environmental, social and economic risks, costs and opportunities associated with our investments. 

So, how do we turn our current market, which largely disguises the inclusion of lemons, into lemonade (or a more transparent and efficient market designed for long-term sustainability)? We need companies to disclose clear, consistent, comparable and more comprehensive information regarding their sustainability efforts and impacts. 

Enter: The necessity of Sustainability-related disclosures.

This year, as part of a dedicated team of graduate researchers and consultants, I have mapped and evaluated the landscape of sustainability-related disclosures — including ISSB standards, G20 nations’ sustainability-related disclosure regulation and stock exchange rules. Our research has yielded insights for companies, investors and policymakers today — and informed our predictions for the future of the sustainability-related disclosure landscape. Below, I reflect on our research and synthesize our insights to detail what is likely next for sustainability-related disclosures:

• Harmonizing Global Standards: Asymmetric information can arise when companies operate across jurisdictions with varying disclosure requirements and standards. Global harmonization of sustainability-related disclosure standards can help mitigate this asymmetry by ensuring consistency and comparability of information across regions. With this, investors and policymakers alike will be able to access more accurate assessments of companies' sustainability performance on a global scale. As such, we predict that ISSB will continue finding areas of interoperability — building from the existing interoperability of GHG emissions disclosures and streamlining requirements to inform one, unified global standard. Key factors to achieving this will be: (1) how social and system-level considerations are incorporated, (2) how stakeholders beyond shareholders are considered, and (3) the time horizon deemed material for disclosures.
• Intensifying Stakeholder Pressure: The financial implications of sustainability, especially concerning climate change and social equity, are immense. Governments and markets facing the real costs will intensify pressure on companies to consistently disclose sustainability information.
• Increasing Rigor of Environmental Disclosures: To protect society and the markets we rely on, governments mandating consistent and third-party verified environmental disclosures, including Scope 3, will become more commonplace — especially as larger economies domesticate sustainability standards (e.g., EU’s Corporate Sustainability Reporting Directive).
• Broadening the Scope of Social Disclosures: To-date, social disclosures within leading sustainability standards, ISSB, are limited. As we evaluate the most material aspects of companies’ as it relates to investments, pay equity; diversity, equity and inclusion for all UN-protected groups and identities; and human rights across companies’ value chains will work their way into the mainstream disclosure landscape. However, steps toward their inclusion will likely be met with resistance — similar to the challenges faced by Nasdaq following its recently instituted board diversity disclosure rule.
• Addressing System-level Considerations: Beyond mitigating risk — if we’re to achieve global impact, disclosures must ladder up to global impact goals and include system-level criteria. To do this, metrics, measurement and reporting of corporate impact must be consistent and tied to specific targets that are set in collaboration with industry peers and international conveners like the United Nations.

Reducing information asymmetry and enhancing sustainability-related disclosures will foster more efficient and sustainable systems. As transparency becomes the norm, markets will better account for true costs, risks, and opportunities —ultimately steering us towards a more sustainable future.