Environmental Disclosure and Firm Value—The Case of CDP Report—

Abstract

Recently, environmental disclosure has increased as a result of pressure from shareholders. The disclosure of valuable information has been in the form of mandatory and voluntary disclosure. Voluntary disclosure includes third party ratings conducted by organizations such as CDP (former Carbon Disclosure Project) and Nikkei Research. The information disclosed are commonly used to assess the performance of firms. However, mandatory and voluntary disclosure have shortcomings. For example, firms are not required to disclose information more than required by law/regulation, or may hide negative information when voluntarily disclosing information. Thus, the assessment conducted using mandatory and voluntary information may be biased. Firms have the incentive to conduct voluntary disclosure for various reasons: 1) increase in sales, 2) reducing capital costs, 3) gaining laborers etc. On the other hand, environmental disclosure incurs costs such as internal information gathering and approval from different departments within the firm. In addition, disclosure may damage the firms’ reputation if the third party assessment concludes that the firm is not performing well. In this paper, we check the hypothesis “the firm discloses information through the CDP report because the market rewards the disclosure.” Furthermore, we analyze if the market reacts to high disclosure scores reported in the CDP report. We find that there is no immediate impact of disclosure using the event study method.