Climate Disclosure in the Fossil Fuel Industry

• In Event: Firm Politics in an Era of Climate Crisis

Abstract

Why do firms disclose climate-related information, especially in industries where doing so entails considerable costs? Existing research shows that firms engage in voluntary pro-environmental behavior for strategic reasons, whether to gain market share over competitors or to self-regulate to prevent more stringent government regulations. We build on these theories to argue that climate-related disclosure is a strategic decision based on time horizons. Firms whose stakeholders—investors, suppliers, employees, and customers—have short time horizons can effectively “hold up” their stakeholders’ future value by withholding information about climate risks. By contrast, firms with future-oriented stakeholders are forced to overcome the hold-up problem by reporting accurate and detailed information about future risks. We conceptualize this failure to disclose climate information as a time inconsistency trap. We contend that, in the absence of disclosure regulations, the variance in climate disclosure is explained by time horizons over when these risks will come to fruition.

We test this argument among the world’s major carbon emitters using a novel mixed-method approach. We first develop an original fine-tuned text classification model adapted from the existing ClimateBERT transformer-based language model, which we augment to uniquely categorize disclosures in line with anticipated corporate regulations on climate-related information from the U.S. Securities and Exchange Commission. We use this model to assess climate-related disclosures of approximately 1,000 U.S. publicly-listed oil and gas companies from 2001 to 2022 based on a corpus of annual 10-K filings with securities regulators. We then estimate the impact on firm climate disclosures of stakeholder time horizons using investor composition measures from the finance and management literatures. We supplement our statistical analysis with process tracing of ExxonMobil’s communications with shareholder information requests, based on subpoenaed internal documents from state-level climate litigation and US congressional hearings. Our findings reveal three patterns implied by our theory: (1) there is considerable heterogeneity in climate disclosure by oil and gas firms, in contrast to conventional explanations for holders of climate-polluting assets; (2) disclosure is higher for firms owned by a larger share of investors with long time horizons; and (3) external pressure is only effective in altering firm behavior to a limited extent unless regulatory or judicial safeguards are in place.

Our findings imply that—absent considerably small discount rates—stakeholder pressure by itself is not a sufficient condition for improved corporate responsibility, providing further support for the efficacy of mandatory climate disclosure policies. Our study provides important contributions to the literature on the environmental politics of firms, identifying new causal mechanisms for why firms strategically engage in environmental behavior.

Authors

• Paasha Mahdavi, University of California, Santa Barbara

• Denis Lomov, University of California, Santa Barbara