Tuesday, February 20th @ 11:00-12:30 PM via Zoom
From ESG ratings and current public disclosures on ESG in the U.S., investors cannot disentangle how much firms invest in ESG and the associated ESG performance. To overcome this problem, we use a setting in China, in which regulators mandate firms to disclose the actual amount of environmental investment in annual reports. We examine whether and how environmental investments relate to emission reductions, and how the market reacts to this information. We find that firms that invest more in the environment exhibit greater emission reduction, while changes in environmental ratings from ESG raters fail to predict emission reduction. For firms that have a greener narrative, are less financially constrained, and face higher environmental demand from investors, we observe a more positive relation between investments and reductions. In addition, this positive relation is also strengthened if local governments have more environmentally friendly policies. We find that the market on average penalizes firms that make more environmental investments, but the amount of emission reduction moderates this penalty. Overall, the findings highlight the decision usefulness of newly released information on environmental investment. It has implications for regulators across the globe that are considering mandating certain ESG-related information.