Pietro Bonetti is an Assistant Professor of Accounting and Control at IESE Business School, Christian Leuz is the Charles F. Pohl Distinguished Service Professor of Accounting and Finance at the University of Chicago, and Giovanna Michelon is a Professor of Accounting at the University of Bristol. This post is based on their recent paper.
Disclosure mandates is becoming more popular as a key policy tool to regulate environmental externalities and wider corporate impacts. In the US, the Dodd-Frank Act introduced (among others) disclosure requirements on so-called conflict minerals and mine-safety. More recently, the SEC has proposed a rule requiring companies to report climate related disclosures in their filings. In Europe, the mandatory disclosure of material social and environmental issues has been introduced by the Directive 2014/95/EU (Non-Financial Reporting Directive) for all companies listed on regulated EU markets. The Corporate Sustainability Reporting Directive envisages the adoption of sustainability reporting standards that the European Financial Reporting Advisory Group is currently drafting.
Although targeting corporate environmental impacts with disclosure is not a novel policy tool, (e.g., U.S. 1986 Emergency Planning and Community Right-to-Know Act), we still have relatively little evidence on whether mandated disclosure works for behaviors with dispersed negative externalities as well as how it produces the intended effects.
In our paper, we exploit the staggered implementation of a disclosure mandate to investigate the effectiveness of targeted transparency in addressing environmental externalities and the role that public pressure, spurred by disclosure regulation, plays in driving the changes in firm behavior. Our study examines the role of disclosure mandates in the context of unconventional oil and gas (O&G) development, which combines horizontal drilling with hydraulic fracturing (HF) to extract shale gas and tight oil in deep formations. HF is a highly controversial practice. Although HF has dramatically increased U.S. energy production and lowered energy prices for consumers, it has also triggered several concerns about the use of potentially highly toxic chemicals in the HF fluids, and the related production of large amounts of wastewaters, with negative implications for water quality. Recent evidence finds such surface water impact.
