Coming Clean: Why it Pays to Be Honest About Environmental Impact


When it comes to carbon emissions, corporate instincts may be to keep quiet. But three accounting researchers find that disclosing may actually help a company’s financial performance.

Why it Pays to Be Honest About Environmental Impact

Your mother always told you that if you came clean about something, you’d be dealt with more gently than if you tried to hide it.

It turns out that early lesson may apply to situations immeasurably more complex, too: environmental disclosures and corporate valuations.

Together with two colleagues at the Universities of Wisconsin and Mississippi, University of Notre Dame accounting researcher Sandra Vera-Muñoz helped study the valuation levels of companies that voluntarily disclose their carbon emission levels and companies that do not.

In a study published in The Accounting Review, the researchers find that for large companies, the market indeed rewards disclosing (and reducing) emission levels—and penalizes hiding them.

The results were calculated for S&P 500 firms, some of which disclosed their carbon emissions voluntarily to the Carbon Disclosure Project and others of which did not. Correcting for the self-selection bias from leaders’ decision to disclose, the researchers found the median market value of disclosing firms to be about $2.3 billion higher than the value of their non-disclosing counterparts.

Of course, “coming clean” with environmental disclosures is only the start of the effect. Reducing emission levels helps a firm, too. Vera-Muñoz and her colleagues found that for every additional thousand metric tons of carbon emissions, firm value decreases by $212,000.

That may not sound like a lot, but when you’re dealing with emission levels in the millions of metric tons, $212,000 multiplies quickly. All told, companies in the third quartile (the second-heaviest carbon-emitting group) are worth an average of $1.4 billion less than those in the top quartile (which emit the least), the researchers found.

It’s a paradox that investors would pay attention to a non-financial measure of performance—but they are doing so. PricewaterhouseCoopers reported, for instance, that interest in climate-change risk from institutional investors and other stakeholders had grown eighteen-fold in the past decade.

“Typically, investors only look at financial statement data. But investors are paying attention to this,” Vera-Muñoz says.

The team is now studying whether carbon emissions are also likely to increase the risk faced by a company’s bondholders. While their preliminary results need more study, previous research has shown that higher carbon emissions—and the litigation, remediation, compliance costs, research and development costs, and loss of reputation associated with them—may increase bondholder risk by reducing cash-flow volatility.

"You can no longer pretend as a CEO, CFO, or COO that carbon emissions don’t matter.”

Vera-Muñoz and her fellow researchers predict that firms choosing to disclose their carbon emissions will have a lower cost of debt than their non-disclosing counterparts.


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