The Effect of Mandatory Carbon Reporting on Greenwashing

We study whether mandatory carbon reporting reduces the selective disclosure of favorable versus unfavorable environmental information. Our setting is a regulation mandating firms to report carbon emissions, or mandatory carbon reporting (MCR). Measuring selective disclosure as the difference between how much a firm discloses and how much of the disclosure is indicative of the firm’s true environmental impact, we find that MCR leads to a decline in selective carbon disclosure, consistent with MCR requiring firms to disclose relevant carbon information that they did not report when disclosure was voluntary. We also find that MCR curtails firms’ selective reporting of other, non-carbon environmental information disclosed voluntarily. Further analyses reveal that worse carbon performers had higher levels of selective carbon disclosure prior to MCR, and their revealed poor performance impels them to decrease selective non-carbon disclosure more after MCR. Firms that reduce selective carbon disclosure also reduce their carbon emissions, suggesting that the removal of selective disclosure opportunities under mandated reporting induces firms to make real changes to improve environmental performance. Our study is important to policy makers contemplating mandatory reporting as a means to mitigate greenwashing and address climate change.