Mandatory environmental disclosure policy in the largest carbon emission country

Abstract

Purpose

This paper aims to examine the impact of corporate environmental transparency (CET) on corporate financial performance under a mandatory environmental disclosure policy in China, the largest carbon-emitting country. It aims to clarify the concept of CET and investigate its short-term financial implications for key pollutant-discharging entities (KPEs).

Design/methodology/approach

A multidimensional model is used to construct a comprehensive CET index for KPEs in China. Empirical tests are conducted to assess the relationship between CET and corporate financial performance.

Findings

The study finds a negative relationship between CET and corporate financial performance in the short term. Increased environmental transparency necessitates higher environmental resource allocation, adversely affecting profits. The results remain unchanged from a battery of robustness tests. Despite mandatory disclosure, companies tend to provide general and vague information rather than specific and meaningful environmental data.

Research limitations/implications

The findings provide rich practical implications for policymakers to improve a mandatory environmental disclosure policy. The paper also contributes to the existing knowledge by developing a measure of CET and presenting new evidence to the debate on whether corporate environmental disclosure can be regarded as transparency.

Practical implications

Policymakers are advised to refine mandatory environmental disclosure regulations to ensure genuine transparency and to implement policy measures that alleviate the financial burdens of companies with high CET levels, thereby encouraging sustainable practices.

Originality/value

This paper contributes to the existing knowledge by developing a measure of CET and providing new evidence on the debate over whether environmental, social and governance (ESG) disclosure equates to transparency. It emphasizes the complexity of transparency and the inadequacy of current environmental disclosure practices among KPEs. The study underscores the need for financial support for companies with high CET levels to alleviate short-term financial strains and promote long-term sustainability.

Citation

Cai, W., Bai, M. and Davey, H. (2024), "Mandatory environmental disclosure policy in the largest carbon emission country", Pacific Accounting Review, Vol. 36 No. 5, pp. 527-560. https://doi.org/10.1108/PAR-04-2023-0055