Study Shows EPA’s Unintended Effect on Voluntary Climate Disclosures by Public Firms

Public firms facing inspections or enforcement actions by the Environmental Protection Agency (EPA) disclose significantly less information about their environmental risks and performance, finds a new study by Assistant Professor of Accounting and Information Assurance Mark Zakota of the University of Maryland’s Robert H. Smith School of Business, forthcoming in the Review of Accounting Studies.

Zakota analyzed more than 60,000 earnings conference calls by 2,811 U.S.-listed firms, spanning the period from 2002 to 2019. His research reveals that EPA scrutiny leads to an 18% average decline in the quantity and quality of a firm’s voluntary environmental disclosures.

These findings are especially timely, Zakota notes, given the Securities and Exchange Commission’s (SEC’s) recent efforts to satisfy investor demand for transparent climate disclosures. In March 2024, the SEC adopted mandatory climate-disclosure rules, only to issue a stay in April 2024 and withdraw its legal defense in early 2025 after extensive legal challenges.

Zakota’s findings suggest that, even if the SEC advances its climate-disclosure initiative, concurrent EPA inspections and enforcement actions may undermine the transparency the commission hopes to achieve, unless the two agencies coordinate their oversight or firms strengthen their environmental governance.

The chilling effect of EPA scrutiny is most pronounced among firms whose boards lack directors with environmental expertise. “Environmental expert directors appear to mitigate concerns about disclosure costs for scrutinized firms,” Zakota explains, highlighting the importance of board-level expertise in sustaining transparent climate communication.

Read the study: “EPA Scrutiny and Voluntary Environmental Disclosures.”