Center for Advancing Accounting

Motivating ESG Activities Through Contracts, Taxes and Disclosure Regulation

• In Event: Motivating Factors for CSR and Sustainability Activities

Abstract

Using a model where firm managers can influence the entire distribution over financial and ESG outcomes, we examine how ESG activities can be motivated through 1) contracts, 2) taxes and 3) disclosure regulation. Executive compensation contracts can produce changes in a firm's ESG activities, but these changes are limited by how much shareholders actually value ESG. Taxes can align shareholder objectives more closely with societal objectives, but only to the extent that ESG outcomes can be reliably measured; moreover, taxes can have potentially unintended consequences when the taxed outcome is correlated with other outcomes. Finally, disclosure regulation can empower markets to partially self-discipline by providing information about firms' ESG technologies, as this enables powerful ESG-conscious firms to compete against brown firms and cooperate with green firms. However, disclosure regulation can hurt ESG outcomes if powerful firms do not value ESG, and it has little effect when market power is disperse.

Authors

• Jonathan David Bonham, The University of Chicago

• Amoray Riggs-Cragun, The University of Chicago