Shareholder Activism and Firms’ Voluntary Disclosure of Climate Change Risks

Managers are increasingly facing shareholder pressure to disclose and manage their climate change risks. The reason for this surge in climate-related shareholder activism is the growing recognition of increased costs and risks associated with climate change as well as the fact that, in many countries, the disclosure of nonfinancial information is not mandated by law. Despite the growing importance placed on climate change risks, little is known about companies’ exposure to climate change risks, their disclosure of such risks and what strategic actions they take to manage and mitigate those risks.

A working paper by Caroline Flammer, Michael W. Toffel and Kala Viswanathan examines whether shareholder activism can elicit greater disclosure of firms’ exposure to climate change risks in the absence of mandated disclosure requirements. The authors explore the heterogeneity among shareholders and examine the valuation implications to assess whether investors value the disclosure of climate risk information.

The paper finds that environmental shareholder activism increases the voluntary disclosure of climate change risks, especially if initiated by investors who are more powerful or whose request has more legitimacy. The authors also find that companies that voluntarily disclose climate change risks following environmental shareholder activism achieve a higher valuation, suggesting that investors value transparency. While the results indicate that private governance is effective in eliciting the disclosure of climate change risks, the authors explain that it is unlikely to substitute for public governance.