When climate-risk disclosures reduce green investment and welfare

Department: Finance

Speaker: Snehal Banerjee (Univ. of Michigan)

Room: T027

Abstract 

Conventional wisdom suggests that greater climate-risk disclosure improves welfare. We show that this need not be true. A firm endogenously chooses whether to adopt a costly green project to maximize its stock price. When disclosure reveals the project’s climate-risk exposure (“greenness”), mandatory transparency reduces green adoption and can lower investor welfare. We characterize when mandatory disclosure underperforms both no disclosure and costly voluntary disclosure. Finally, we show how these conclusions change when investors can trade climate derivatives or when firms choose to adopt abatement technologies.

Keywords: greenness, climate disclosure, welfare, risk sharing, climate regulation, abatement