Voluntary Corporate Carbon Assurance and Investment Efficiency: International Evidence

Synopsis The research problem This study investigated whether and how voluntary carbon assurance affects corporate investment efficiency and examined the heterogeneity of its effect. Motivation With climate change profoundly impacting the global economy, firms are actively seeking independent carbon assurance to enhance the credibility of carbon information they disclose. Despite its escalating importance, our current understanding of carbon assurance remains limited. Research has explored the factors determining corporate decisions on carbon assurance and its consequences on information disclosure. However, there is a lack of theoretical analysis and empirical evidence regarding the real effects of carbon assurance on firms. We addressed this research gap by examining its effect on firms’ investment efficiency. Hypothesis We state our hypothesis in the null form: Carbon assurance is not associated with corporate investment efficiency. Target population We studied an international sample of publicly listed firms that participated in the CDP (previously known as the Carbon Disclosure Project) from 2008 to 2019. Adopted methodology We primarily employed ordinary least squares regressions with year, country, and sector fixed effects. We also adopted the Heckman two-stage model and a quasi-difference-in-differences design to address endogeneity concerns. Analysis We focused on how carbon assurance affects corporate investment efficiency through two mechanisms. Specifically, the signaling effect centers on the role of carbon assurance in signaling a firm’s commitment to carbon reduction, facilitating the acquisition of necessary investment resources and consequently enhancing investment efficiency. The governance effect emphasizes that carbon assurance promotes the quality of carbon information disclosure and the overall information environment, thereby mitigating information asymmetry and agency problems that impede efficient investment decisions. Findings We observed that carbon assurance is negatively associated with inefficient investment, especially underinvestment. However, we found no sufficient evidence that the impact of carbon assurance on investment efficiency varies with the type of assurance provider (audit vs. nonaudit firm), coverage scope, or assurance level. Further analyses confirm that the adoption of carbon assurance is associated with superior environmental performance, enhances the quality of carbon information disclosure, and reduces information asymmetry. The impact of carbon assurance is stronger in economically developed countries and carbon-intensive sectors. However, it is weaker when management compensation contracts include long-term objectives or when a sustainability committee is in place.