Disclosure Is Not Enough: Why Markets Need Procedural Clarity

• Climate transition risk is not incorporated by markets in a smooth, continuous way. Trading responses tend to appear around moments when policy becomes easier to interpret.
• Environmental performance loses much of its trading relevance when the regulatory path is procedurally unsettled.
• Once the policy process is resolved, trading on environmental information returns, even when the policy direction is environmentally unfavourable.
• For policymakers, regulators, exchanges and market infrastructures, better disclosure needs to be matched by clear timelines, legal status and implementation rules.

The binding constraint in climate finance is no longer only the availability of environmental data. It is whether markets can use that data with enough confidence to trade on it. Environmental scores are now widely available, climate disclosure frameworks have expanded, and investors increasingly describe climate transition risk as financially relevant. The Global Sustainable Investment Alliance estimated sustainable investment assets across major markets at US$30.3 trillion in its 2022 review, while investor surveys show that regulatory climate risk is already viewed as a material concern.

Yet market behaviour does not always match this expectation. If environmental information is public and transition risk matters, we might expect greener and browner firms to be treated differently on a consistent basis. Instead, climate-related trading responses often seem to arrive in bursts. They strengthen around major policy events and fade during quieter periods, even though firms' environmental characteristics remain observable.

That pattern raises a practical question for sustainable finance: when does environmental information become actionable?

In theory, the channel is straightforward. A firm with a weaker environmental profile may face higher future compliance costs, greater exposure to stranded assets, or more pressure to adapt its technology and business model. A stronger environmental profile may point to lower transition exposure or greater flexibility in a low-carbon economy. Investors should therefore have reason to incorporate environmental differences into prices, portfolios and trading decisions.

The evidence, however, is mixed. At some points, weaker environmental performers appear to command a return premium, consistent with investors being paid to bear transition risk. At other points, greener firms appear to benefit from investor demand. Often, neither pattern is stable. The market does not seem to ignore climate risk, but it also does not appear to price or trade it in a steady way.

Common explanations only take us part of the way. A policy-direction story says investors buy greener firms when regulation is expected to tighten and move away when policy weakens. But that would imply a response that broadly follows the policy stance, not a pattern that switches on and off. A preference story says investors increasingly want green assets, but preferences usually shift gradually rather than abruptly. An information-friction story says ESG ratings are noisy and sometimes inconsistent, which is true, but noise should produce slow adjustment, not the near disappearance of trading responses in particular policy regimes.

The alternative explanation is procedural policy clarity. Environmental information matters financially because it is filtered through rules: regulation, carbon pricing, disclosure obligations, technology standards, enforcement and transition plans. When those rules are unsettled, investors may still know which firms look greener, but they cannot easily infer what that means for future cash flows. The information is visible, but the link between that information and expected financial consequences is unclear.

This distinction matters. The argument is not that pro-climate policy activates markets and anti-climate policy stops them. A resolved framework can be useful to investors even when its environmental direction is unfavourable because it reduces uncertainty about the route ahead. Policy ambiguity, by contrast, can make waiting more attractive than trading.

The study behind this article examines this mechanism through U.S. participation in the Paris Agreement. The Agreement did not itself impose direct domestic statutory obligations on U.S. firms, which is important for the analysis: it helps separate investors’ response to procedural policy clarity from a response to immediate regulatory compliance costs. Its value lies in the fact that the major Paris milestones, including adoption, signature, U.S. joining, withdrawal steps and rejoining, served as public signals about the credibility and procedural status of U.S. climate policy.

The empirical sample covers S&P 500 firms from 2010 to 2023. After applying the required data filters, it includes 460 firms and more than 1.02 million firm-day observations. The period is divided into nine Paris-related phases, each representing a different level of procedural certainty.

The study centres on the direction of trading pressure rather than returns, because genuine portfolio reallocation requires sustained net buying or selling. This allows the analysis to test whether investors trade differently on environmental information across policy regimes, rather than only whether prices move around particular events.

The analysis compares the ambiguous Intent-to-Withdraw period with resolved Paris phases before and after it. The earlier adoption, signature and U.S. joining phases show how trading sensitivity strengthens as the Paris framework becomes progressively codified. The later formal withdrawal and rejoining phases provide the sharper test of the mechanism: both are procedurally resolved, but they point in opposite environmental directions. From June 2017 to November 2019, by contrast, the United States had announced its intention to leave the Paris Agreement, but the legal path, timing and completion of that process remained unresolved. This was not simply an unfavourable climate policy period. It was a period in which the process itself remained open, making it possible to separate procedural clarity from policy direction.

The results are clear. During the earlier Paris participation phases, as the framework became progressively more settled, environmental performance became more strongly related to directional trading. In practical terms, the difference between a lower-scoring and higher-scoring firm, roughly 46 points in the sample's environmental score distribution, is associated with meaningful movement in net buying pressure towards greener firms during resolved participation periods.

During the Intent-to-Withdraw phase, that relationship is no longer statistically distinguishable from zero. This is not because environmental data disappear. Environmental scores remain available, and firms continue to differ widely in their environmental grades. What changes is the usefulness of that information for trading. With the policy path unresolved, investors appear less able to translate environmental performance into expected regulatory costs, risks or advantages.

Once uncertainty around the policy process is removed, trading sensitivity to environmental performance revives. Importantly, this happens not only after the United States rejoins the Paris Agreement, but also after formal withdrawal. That finding is central. Formal withdrawal is less favourable from a climate policy perspective, while rejoining is more favourable. If the link between environmental performance and trading pressure reappears under both regimes, the common element cannot be policy direction alone. It is procedural resolution.

The mechanism is intuitive. Policy ambiguity raises the risk of acting on environmental information because investors do not know how strongly transition exposure will affect value. It also increases the value of waiting. Rebalancing a portfolio can be costly to reverse. If an investor moves too early and the expected policy outcome fails to materialise, the trade may have been premature. If the investor waits too long and regulation becomes binding, the adjustment may come too late. When the policy process is unclear, holding back can be rational. When the process becomes clearer, coordinated trading can restart.

Several tests support this interpretation. The pattern remains after controlling for firm-level fundamentals and trading conditions, information events, broader market and macroeconomic forces, political cycles and pandemic-period stress. Placebo tests using 500 randomly reordered phase sequences show that the responses around the actual resolved milestones are difficult to reproduce by chance, suggesting that the findings are tied to the real policy sequence rather than arbitrary sample splits.

The evidence also points to a specifically environmental channel. When the environmental, social and governance pillars are considered together, the effect is concentrated mainly in the environmental pillar, the dimension most directly linked to compliance costs, stranded-asset exposure and technology transition. The result is not simply a broad ESG effect. It is tied to the part of ESG most connected to climate policy pay-offs.

The policy message is straightforward. Disclosure is necessary, but it is not sufficient. Markets also need to understand how disclosed information will become financially material. A climate score, emissions measure or transition metric is more useful when investors can connect it to a known policy process, including who is covered, when rules apply, how they will be enforced and what legal status the framework carries.

This is where exchanges and market infrastructures have a direct stake. Sustainable finance depends not only on the quantity of information available to investors, but on whether that information can support allocation and risk management decisions. Clear implementation rules, credible timelines and stable procedures help turn environmental data from a reporting output into a market input.

The lesson extends beyond climate finance. Similar dynamics may arise whenever firm characteristics matter through a policy-dependent channel, including financial regulation, competition policy, trade measures and industrial strategy. When the rules are not yet pinned down, investors may see the relevant information but still delay acting on it.

Markets do not move on information simply because it exists. They move when information can be connected to expected pay-offs with enough confidence. For climate finance, that means the next frontier is not disclosure alone. It is disclosure made actionable through procedural clarity.

For more information, please get in touch with the author at maryam.alhalboni@york.ac.uk.

Author's note

This article draws on an academic paper that is currently under revision. This article can be updated with the final link once the academic paper has been published.

Disclaimer

The views, thoughts and opinions contained in this Focus article belong solely to the author and do not necessarily reflect the WFE's policy position on the issue, or the WFE's views or opinions.