Are Firms Voluntarily Disclosing Emissions Greener?

Do firms voluntarily disclosing emissions have lower levels of greenhouse gases in their in-house and outsourced operations? We examine this question using Scope 1 and upstream Scope 3 emission data reported by firms or estimated by S&P Trucost from 2002 to 2020. Our empirical results reveal that “voluntary disclosing firms” tend to have lower levels of “internal emissions” (i.e., Scope 1 emissions) and yet higher levels of “external emissions” from upstream suppliers (i.e., estimated upstream Scope 3 emissions). Overall, disclosing firms tend to have more emissions in the entire supply chain. A plausible explanation is that they may outsource more emissions to upstream suppliers than non-disclosing firms. By exploring the potential mechanisms that explain our results, we find that disclosing firms tend to exert more effort to reduce their internal emissions and outsource more carbon-intensive operations to suppliers. This finding is consistent with their decreasing Scope 1 emissions and increasing Scope 3 emissions. In addition to examining differences in emissions between high- and low-emission industries and across regions, we also investigate the implications of mandatory environmental reporting regulations by different governments and find these regulations can effectively nudge disclosing firms to reduce total emissions, including Scope 1 and Scope 3. As more regulations require the disclosure of Scope 3 emissions, our findings highlight the necessity for firms to develop processes and exert efforts to measure, monitor, and control both in-house and outsourced emissions. Additionally, our findings indicate that Environmental, Social, and Governance investment managers should perform due diligence rather than solely relying on firms that disclose their Scope 1 emissions.