Real Effects of Proposed Scope 3 Disclosures

Abstract

We investigate the real effects of proposed Scope 3 disclosures. We hypothesize that the threat of requiring Scope 3 emissions disclosures increases affected firms’ preference for greater control over production and GHG emissions, which renders outsourcing to foreign countries less desirable. We use the SEC’s March 2021 statement requesting input for climate-related disclosures as a shock to the probability that Scope 3 emissions disclosures would be required. Using difference-in-differences analyses, we find evidence that affected firms reduce imports following the proposed rule, relative to unaffected firms. The reduction in imports is concentrated in firms for which disclosing Scope 3 emissions are likely costlier: with material Scope 3 emissions, not voluntarily disclosing GHG emissions, in industries with fewer supportive comments on mandating disclosure of Scope 3 emissions in the proposal, and in imports from more pollutive countries. The reduction is also concentrated among firms with greater ability to reduce foreign outsourcing: with less reliance on imports of minerals, with higher excess production capacity, and without publicly stated GHG emissions reduction targets. Further, the reduction is more pronounced among firms facing Scope 3 disclosure pressures from the EU and California. Finally, we find some evidence that affected firms increase in-house production and improve their environmental efforts. Collectively, our findings suggest that the threat of Scope 3 disclosures induces real changes in corporate decisions.

Keywords: Climate disclosure; GHG emissions; supply chain; real effects

JEL Classification: G28; M41; L14; L23