Corporate reporting is at the center of the current debate on how to curb carbon emissions. Nonetheless, the financial information traditionally provided by firms is deemed insufficient to understand the impact of corporate activities on the environment. As governmental and civil entities work to regulate sustainability reporting, they face important challenges. What kind of (non-financial) information should firms be required to disclose? How can sustainability reporting standards be enforced? And what will the “real effects” of disclosure regulation have on companies?
As standards that will become mandatory in the EU in the next years are being developed, academic research like this should help in the urgent task of developing rules that are based on sound economic logic and rigorous evidence.
Summary
We first provide evidence that institutional investors who sign up to the CDP – the world leading repository of corporate climate risk information – do so for genuine reasons and not merely as a marketing front (i.e., greenwashing).
Second, we examine the use of ESG performance metrics in executive compensation contracts. We first document that a growing fraction of publicly traded companies around the world now incorporate ESG metrics in the compensation schemes of their top executives. Our analysis links the reliance on these metrics to firm fundamentals, the geographic location of firms as well as the influence of institutional shareholders. Our findings also suggest that the adoption of ESG variables in managerial performance measures is accompanied by improvements in ESG performance and meaningful changes in the compensation of executives.
Third, we examine the role of reporting incentives on firms’ trading of emission allowances. We document that firms are more likely to sell allowances when pre-selling earnings performance falls below zero. We also provide other evidence consistent with opportunistic selling of emission allowances for financial reporting purposes.
Our findings have several important implications. To begin, they shed light on the role of institutional shareholders in the transition towards a more sustainable economy, specifically in what relates to disclosure and compensation practices. Moreover, our results add weight to growing calls for standard setters to fill the regulatory void for definitive guidance on accounting for pollution assets and liabilities.
Overall project development
We have developed three research papers. Two of them have received a “revise and resubmit” at top academic journals, which means that the probability of publication is high. The third one has not been submitted yet, but -based on our presentations at academic seminars- we expect that it will also be well received by top journals.
Papers related to the project
- “Why do Institutional Investors Request Climate Related Disclosures?”, International Evidence. Journal of Accounting and Economics (in revision).
- “Executive Compensation Tied to ESG Performance”. Journal of Accounting Research (in revision).
- “Trading of Emission Allowances and Reporting Incentives”. Journal of Financial Economics (under submission).
We are also working on other related papers that were initiated under the umbrella of the STI project. In short, the level of achievement of the project is high.
Impact and outputs
This project is one step to understand what are the factors that determine the success of the ongoing transition towards a more sustainable economy. Our results shed light on the role of institutional shareholders in the transition towards a more sustainable economy, specifically in what relates to disclosure and compensation practices. Moreover, our results add weight to growing calls for standard setters to fill the regulatory void for definitive guidance on accounting for pollution assets and liabilities. We believe this is in line with the objective and strategies of the STI, which are related to emerging social trends and their effects on human communities.
The dissemination activities include presentations at several conferences and research seminars at various universities: the Alliance for Research on Corporate Sustainability (ARCS) Annual Conference, the American Accounting Association (AAA) Western Region Meeting, the Canadian Academic Accounting Association (CAAA) Annual Conference, the Eighth International Symposium on Environment and Energy Finance, the European Accounting Association (EAA) Annual Congress, the AAA Financial Accounting and Reporting Section (FARS), Florida Atlantic University, Free University of Bozen Bolzano, Inquire UK (Institute for Quantitative Investment Research), London School of Economics, NEOMA Sustainable Finance Conference, OCC Symposium on Climate Risk in Banking & Finance, San Diego State University Corporate Governance Institute, and the University of California San Diego, the annual conference of the Journal of Accounting Research, Manheim University, The University of Miami, The University of Bristol, and Tilburg University, University of Bath, and Haskayne and Fox Accounting Conference.
