Navigating Emission Reduction: The Interaction of Disclosure Regulation and Institutional Support in China

We examine the impact of a disclosure regulation on corporate carbon emissions and the critical factors that influence its efficacy. In 2021, the Chinese Securities Regulatory Commission (CSRC) introduced a disclosure regulation which requires all public firms to create and report their ESG activities in a specifically designed environmental and social responsibility section in their annual financial statements, and explicitly urged firms to disclose the measures undertaken to reduce their carbon emissions and the outcomes in the section. Using a difference-in-differences design, with the treatment firms defined as those affected by the regulation and the control firms as those indicating its inapplicability, we find a significant decrease in the treatment firms’ carbon intensity (emissions) compared to control firms. Motivated by field evidence, we examine and find that the emission reduction effect of the disclosure regulation is observed solely among firms benefiting from the existence of institutional support that facilitate their carbon reduction efforts. Our findings underscore the importance of complementing carbon disclosure regulations with the necessary institutional support.