A Theoretical Framework for Environmental and Social Impact Reporting

Abstract

We provide a theoretical framework for reporting of firms' environmental and social impact (ESI). In our model the characteristics of a ESI report impact managerial efforts related to ESI, cash flows, stock prices, and greenwashing. In particular, we describe the implications of ESI report congruity, whether the report captures ESI inputs or outcomes, and the manager's tradeoffs regarding ESI efforts and reporting bias. Although stock price incentives tend to encourage ESI efforts and greenwashing simultaneously, ESI reports that capture ESI effects on cash flows tend to have a stronger price reactions than ESI reports that capture effects on ESI per se. ESI reports aligned with investors' aggregate preferences provide stronger incentives and lead to more positive outcomes than ESI reports that focus on either ESI or cash flow effects individually.