Climate Disclosure: Theory and Evidence

This paper investigates the real effects of climate disclosure requirements. I develop a model in which firms are financed by responsible investors who are heterogeneous in their aversion to holding polluting firms and are imperfectly informed about firms’ externalities. I demonstrate that improving climate disclosure requirements has an ambiguous impact on welfare and pollution due to two different effects. First, it reduces the size of the dirty sector. Second, it also reshapes firms’ shareholder base, resulting in the dirty firm being financed by investors who are, on average, less concerned about pollution. This latter effect undermines the dirty firm’s incentives to adopt green technology. This challenges the conventional view that improving climate disclosure is beneficial and suggests that some level of greenwashing could be optimal. Using data on the staggered adoption of mandatory climate disclosure requirements across countries, I provide supportive empirical evidence of these mechanisms.