EPA Scrutiny Restricts Environmental Disclosures in Conference Calls

Strategic Insights -

A new study by Assistant Professor of Accounting and Information Assurance at the University of Maryland's Robert H. Smith School of Business, forthcoming in the Review of Accounting Studies, reveals that public firms facing inspections or enforcement actions by the Environmental Protection Agency (EPA) disclose significantly less information about their environmental risks and performance. The research analyzed over 60,000 earnings conference calls by 2,811 U.S.-listed firms, spanning the period from 2002 to 2019. The study found that EPA scrutiny leads to an 18% average decline in the quantity and quality of a firm's voluntary environmental disclosures. This finding is particularly relevant given the Securities and Exchange Commission's (SEC) recent efforts to satisfy investor demand for transparent climate disclosures.

Key Takeaways:

  • The study analyzed over 60,000 earnings conference calls by 2,811 U.S.-listed firms, spanning the period from 2002 to 2019.
  • EPA scrutiny leads to an 18% average decline in the quantity and quality of a firm's voluntary environmental disclosures.
  • The chilling effect of EPA scrutiny is most pronounced among firms whose boards lack directors with environmental expertise.
  • Environmental expert directors appear to mitigate concerns about disclosure costs for scrutinized firms.
  • The study suggests that concurrent EPA inspections and enforcement actions may undermine the transparency the SEC hopes to achieve, unless the two agencies coordinate their oversight or firms strengthen their environmental governance.
  • Firms with stronger environmental governance, such as those with environmental expert directors, are more likely to maintain transparent climate communication.

Statistics:

  • 18% average decline in the quantity and quality of a firm's voluntary environmental disclosures due to EPA scrutiny.
  • 2,811 U.S.-listed firms analyzed in the study.
  • 60,000+ earnings conference calls analyzed in the study.
  • 2002 to 2019: the periods covered by the study.

Sources:

  • Zakota, Faculty, University of Maryland's Robert H. Smith School of Business. (Forthcoming). Review of Accounting Studies.
  • University of Maryland's Robert H. Smith School of Business. About the Robert H. Smith School of Business.