Environmental Disclosures in Global Supply Chains

Abstract

Economies committed to environmental goals, such as mitigating global warming, face the challenge that pollution and emissions largely originate from  activities in foreign countries. While governments may attempt to tax domestic firms' sourcing of inputs from brown international firms, such approaches often have to rely on disclosures from these foreign companies.  Addressing this issue, we examine international supply chain partners' disclosure strategies and their interplay with a domestic government's optimal regulatory policies. Such disclosures are key to SCOPE-3 emissions calculations and meaningful ESG ratings. Optimal policies in our environment account for endogenous information asymmetries and the exercise of market power by domestic firms, leading to predictions that contrast with the notion of a common price for CO2 emissions, as is implied by carbon credit markets. Our analysis characterizes how domestic households' exposures to global externalities shape both a government's optimal regulations and the precision of foreign firms' voluntary disclosures.

Keywords: Carbon credit markets, ESG ratings, Global warming, Asymmetric information, Optimal regulation, SCOPE-3 emissions

JEL Classification: F18, L11