EPA Scrutiny Undermines Environmental Transparency in Publicly Traded Firms

Strategic Insights -

Public firms facing Environmental Protection Agency (EPA) inspections or enforcement actions disclose significantly less information about their environmental risks and performance, finds a new study by Mark Zakota of the University of Maryland's Robert H. Smith School of Business. The research analyzed over 60,000 earnings conference calls by 2,811 U.S.-listed firms between 2002 and 2019, revealing an 18% average decline in the quantity and quality of environmental disclosures. This finding is particularly relevant given the Securities and Exchange Commission's (SEC) efforts to satisfy investor demand for transparent climate disclosures.

Key Takeaways:

  • Public firms facing EPA scrutiny disclose 18% less information about environmental risks and performance.
  • EPA inspections and enforcement actions may undermine the SEC's climate-disclosure initiative unless the two agencies coordinate their oversight or firms strengthen their environmental governance.
  • Firms whose boards lack directors with environmental expertise are more likely to experience the chilling effect of EPA scrutiny.
  • Environmental expert directors can mitigate concerns about disclosure costs for scrutinized firms.
  • The study analyzed 60,000 earnings conference calls by 2,811 U.S.-listed firms between 2002 and 2019.
  • The reductions in environmental disclosures were observed across various industries and firm sizes.
  • The research highlights the importance of board-level expertise in sustaining transparent climate communication.

Statistics:

  • 18% average decline in the quantity and quality of environmental disclosures for firms facing EPA scrutiny.
  • 2,811 U.S.-listed firms analyzed in the study.
  • 60,000 earnings conference calls examined between 2002 and 2019.
  • The study observed reductions in environmental disclosures across various industries and firm sizes.

Sources:

  • Zakota, M. (forthcoming). Public Firms and the Environmental Protection Agency: Does Scrutiny Matter for Disclosure Quality & Quantity? Review of Accounting Studies.