Effects of Mandatory Carbon Reporting on Unrepresentative Environmental Disclosures

Abstract

We study whether mandatory carbon reporting reduces the disclosure of favorable versus unfavorable environmental information (unrepresentative disclosure). Our setting is a regulation mandating firms to report carbon emissions, or mandatory carbon reporting (MCR). Measuring unrepresentative disclosure as the difference between how much a firm discloses and how much of the disclosure is indicative of the firm’s overall environmental damage, we find that MCR leads to a decline in unrepresentative carbon disclosure, consistent with MCR requiring firms to disclose environmentally impactful carbon information that they did not report when disclosure was voluntary. We also find MCR curtails firms’ unrepresentative disclosure of other, non-carbon environmental information disclosed voluntarily before and after MCR. Further analyses reveal worse carbon performers had higher levels of unrepresentative carbon disclosure prior to MCR, and their revealed poor carbon performance impels them to decrease unrepresentative non-carbon disclosure more after MCR. Firms experiencing a reduction in unrepresentative carbon disclosure around MCR also reduce their carbon emissions.

Keywords: Greenwashing, selective disclosure, mandatory ESG reporting, climate change, greenhouse gas emissions