Fighting Climate Change with Disclosure? The Real Effects of Mandatory Greenhouse Gas Emission Disclosure

Abstract

We examine whether mandatory disclosure of greenhouse gas (GHG) emissions influences companies' GHG emission levels. We identify the disclosure effect by exploiting a mandate requiring UK-incorporated listed companies to disclose information on GHG emissions in their annual reports. Using a difference-indifferences design, we show that disclosing GHG emissions in annual reports reduces emission levels by about 18% over three years. We find that emission reductions primarily occur for first-time mandatory reporters compared to firms who already voluntarily reported GHG information prior to the mandate. Further, we find that the emission reductions are permanent rather than transitory and we obtain stronger results for firms with larger savings potentials. Our effects are robust to various sample specifications, i.e., analysis at the installation-and firm-level, alternative control groups, and propensity score matching.

Mandatory disclosure, greenhouse gas emissions and the cost of equity capital: UK evidence of a U‐shaped relationship

“…TDC theory generally assumes that corporate disclosure affects its receiver's behaviour, such as shareholders and stakeholders, resulting in tangible consequences (Downar, Ernstberger, Rettenbacher, Schwenen, & Zaklan, 2019). Corporations as information providers directly respond to the various behaviours of information receivers by adjusting their related decisions.…”

“…Similarly, only after mandating GHGD, shareholders and stakeholders are allowed to assess a firm's GHG emissions information and to compare it with those of peers. Thus, the 2013 act is expected to decrease the cost of stakeholders' information processing in relation to GHG emissions (Downar et al, 2019). Likewise, GHGD in annual reports has boosted public awareness of firms' GHG emissions, which might have been reinforced by social and traditional media coverage that picks up on the GHG emission information and reports on it (Baboukardos, 2017).…”

“…Reporting GHG emission information is of prominent importance to stakeholders stemming from its impact on a firm's climate risks, such as (i) reputational risks, (ii) regulatory risks and (iii) litigation risks (DEFRA, 2012). Regulatory risks are associated with future changes in environmental regulations that may incrementally internalise the cost of GHG emissions through taxes and trading schemes, for example, which is expected after a certain point (the turning point) to increase firms' cost of capital (Downar et al, 2019). Reputational risks may result from changing the consumer or market behaviour.…”

“…Prior studies (e.g., Downar et al, 2019; Hombach & Sellhorn, 2019; Kölbel et al, 2017) state that regulatory risks are associated with future changes in environmental regulations that may incrementally internalise the cost of GHG emissions through taxes and trading schemes are expected to affect the association between GHG reporting and firms' cost of capital. Specifically, Albarrak et al (2019) indicate that regulators are increasingly obliging firms to disclose their GHG information worldwide.…”

“…Theoretically, TDC theory states that regulatory risks are associated with future changes in environmental regulations that in turn may incrementally internalise the cost of GHG emissions through taxes and trading schemes, which is expected after a certain level of disclosure to increase firms' cost of capital (Downar et al, 2019). Likewise, stakeholders may act on climate change, such as boycotts, which can affect high‐GHG firms by increasing their financial risk and the probability of sanctions (Hombach & Sellhorn, 2019; Kölbel et al, 2017).…”