The Time Inconsistency Trap of Climate Disclosure in the Fossil Fuel Industry

• In Event: Transparency in Climate Politics: Evidence from China, Europe, and the US

Abstract

Why do some firms disclose climate-related risks, while others demur? Political science research has shown that institutions and actors shape firm choices over corporate responsibility: regulations and public pressure positively influence environmental performance and transparency. Yet existing explanations cannot account for considerable within-industry heterogeneity in the extent to which firms report climate accounting and disclose climate risks. We conceptualize the failure to disclose climate risks as a time inconsistency trap: by not accurately disclosing future risks, firms effectively hold-up investors’ future profits. 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. Firms whose stakeholders (investors, leadership, employees, customers, the public) have long time horizons are forced to overcome the holdup problem by reporting accurate and detailed information about future risks. By contrast, firms whose stakeholders have short time horizons can withhold information about future risks without fear of backlash from investors and the public.

We test this argument in the context of the fossil fuel industry, using novel data on the climate disclosures of roughly 1,000 oil and gas companies based on text analysis of SEC filings. We then estimate the impact on firm climate disclosures of stakeholder time horizons, measured using (1) institutional investor composition, (2) investor governance indicators, and (3) regulatory jurisdiction based on firm headquarter location. The statistical findings are supplemented 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 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.

Authors

• Denis Lomov, University of California, Santa Barbara

• Paasha Mahdavi, University of California, Santa Barbara