Abstract
We study the negative externalities of mandatory environmental, social, and governance (ESG) disclosure through the lens of regulatory salience. Our analysis exploits a unique setting in China, where firms differ in their exposure to a countrywide political campaign of combating poverty depending on whether they are required to disclose their contribution to it on their ESG reports (“treatment”). Using a difference-in-differences analysis, we find that treated firms significantly increase their donations to poverty alleviation but also their pollutions, following the treatment. Negative environmental externalities increase with firms’ financial constraints and market competition. Further evidence shows that treated firms receive more government subsidies and state-owned bank loans, and achieve greater operating performance and valuation. Collectively, these findings suggest that mandatory ESG disclosure may induce firms to trade off different ESG goals by prioritizing more conspicuous ESG practices at the cost of trivializing other, longer-term, issues.
