Environmental, social, and governance disclosure in response to climate policy uncertainty: Evidence from US firms

Increasingly drastic governmental efforts in reducing environmental footprints in face of rising abnormal climate events have urged firms to redirect their strategy to withstand climate-induced policy uncertainty. Despite the incomplete regulatory framework for environment, social, and governance (ESG) reporting, many US firms have voluntarily incorporated ESG content into their public reports. Motivated by this sprouting ESG disclosure pattern of US firms, this study examines whether US firms adjust their ESG disclosure practices in face of changing climate policy. By employing fixed-effect estimations using firm-level and country-level data from various sources, we show that US firms disclose more ESG information following periods of heightened climate policy uncertainty (CPU), consistent with our prediction that firms employ ESG reporting to shelter themselves from CPU risks. Further analyses reveal that firms with more attentive audit committees, more severe financial constraints and earnings management problems, greater emissions and renewable energy consumption, and better comprehension of climate risks experience a stronger positive effect of CPU. Uncertain events and states’ ESG heterogeneity also strengthen the effect. Our results suggest investors analyze firms’ ESG reporting with care during heightened CPU periods and advise policymakers to accelerate their mandate of corporate ESG disclosure.