When a company lands in the headlines for a climate scandal, its reported carbon emissions often drop in the years that follow. That seems like progress: A corporation responding to public pressure by cleaning up its act.
But new research from the University of Washington’s Foster School of Business suggests a less optimistic explanation: Some companies are manipulating their numbers rather than reducing their emissions.
Foster PhD student Carter Sampson and Assistant Professor of Accounting Shawn Shi found a clear pattern in the data.
“After these high-profile climate controversies that are directly related to the firm, companies are more likely to underreport their carbon emissions in the four years after those controversies,” Sampson says.
Unlike financial reporting, which follows strict accounting standards and regulatory oversight, carbon emissions reporting in the U.S. is largely voluntary. Companies report to satisfy stakeholders and burnish their environmental credentials, but there’s significant latitude for managers when calculating the reported emissions numbers. That flexibility creates significant room for manipulation.
The research grew out of an ongoing agenda examining the credibility of non-financial disclosures. In 2019, Shi heard law scholars discussing the reliability of non-financial disclosures on a podcast and found himself intrigued.
“I thought, oh, this is very interesting,” he recalls. “And then I started working on understanding the credibility of corporate social responsibility disclosures.”
More recently, Shi teamed up with Sampson and Brandon Gipper, Associate Professor of Accountancy at the University of Notre Dame, to focus specifically on carbon emissions reporting. That research is now a working paper titled “Do Firms Manipulate Their Carbon Emissions Reporting?”
Scrutinize emissions data before taking it at face value.
Shawn Shi, Assistant Professor of Accounting at the University of Washington’s Foster School of Business, urges investors, regulators and other stakeholders to examine corporate carbon reporting more carefully.
After scandals, companies deliberately underreport emissions
The research team examined what happens after high-profile climate controversies—such as leaked documents about emissions plans, being named a major polluter, or facing public backlash over environmental claims—attract negative attention to a firm’s environmental record, and found clear evidence of intentional manipulation.
The most compelling evidence came from comparing two ways companies can respond to climate controversies: genuinely investing in reducing emissions or just manipulating the numbers. If companies were genuinely committed to reducing emissions, they would take concrete action.
“If we think that firms are really being sincere and they want to decarbonize, then the very first thing they’re going to do is take real actions,” Shi explains. “They’re going to divest their heavily polluting facilities or invest in abatement.”
But that’s not what the data showed.
“After these controversies, we see no systematic change in these kinds of real actions,” Shi says.
More tellingly, the small subset of firms that did take real actions didn’t underreport their emissions.
In other words, some companies were choosing the cheap option—fudging the numbers—over the expensive one.
The researchers also found that manipulation increased with stronger incentives.
“The events that are really severe and covered by these national and international news outlets like the New York Times, where people can actually see the firm’s conduct,” Shi says. “This is when we observe the largest reporting declines relative to benchmarks.”
Investors have experience spotting financial misreporting; emissions reporting is a different story.
Carter Sampson, PhD student in accounting at the Foster School of Business, examines the credibility of corporate climate disclosures and encourages stakeholders to look more closely at how emissions numbers are calculated.
Third-party verification often fails to catch manipulation
One of the study’s more surprising findings concerned third-party assurance, in which companies hire outside firms to verify their emissions numbers. Conventional wisdom suggests this should improve reporting quality. And indeed, following controversies, firms increased their use of such assurance, seemingly to bolster credibility.
But there’s a catch. The same management teams with incentives to manipulate are often the ones hiring the verifiers, creating an obvious conflict of interest. The research found that voluntary assurance didn’t reduce subsequent underreporting unless there was active board oversight.
The opacity of current disclosures compounds the problem. Without standardized requirements, companies can exclude certain facilities from their calculations, choose different methods for measuring the same emissions, or make judgment calls about what counts as part of their operations.
“There’s just so little disclosure around the intermediate calculations that go into final emissions numbers,” Sampson says. “It’s so hard to figure out how firms are calculating this number.”
Why accountants study carbon emissions
Carbon emissions disclosures might not seem like typical business school territory. But as Shi explains, accounting research is fundamentally about accountability and transparency.
“I teach [Foster School] undergrads their first intro to accounting class, and the very first message I try to deliver is that transparency, reporting, and accountability are the core interventions to stem societal harms,” he says.
For Sampson, part of the appeal was the field’s newness and novelty.
“In financial reporting, investors have a good nose for when things aren’t quite right,” he explains. “They have the experience to suspect when things are not the way they should be, but with emissions reporting, it’s just so new; we’re all so new to the game.”
That lack of established expertise creates both challenges and opportunities.
“We have the information, it’s just that the relevant stakeholders don’t know what to do with it,” Sampson says. “They don’t know how to make decisions based on it. So I think this makes this space super exciting.”
Research by Carter Sampson and Shawn Shi finds evidence of emissions underreporting following high-profile climate scandals. Some companies choose the cheap option — fudging the numbers — over the expensive work of cutting emissions.
The takeaway for investors: Treat emissions data cautiously
The findings have clear implications for anyone making decisions based on corporate emissions data. Investors and regulators shouldn’t assume reported numbers are accurate, especially after a company faces climate-related controversy.
“Don’t treat the reported emissions as a pristine metric,” Shi says. Regulators should consider “routine inspections, making sure that these numbers are accurate, or some kind of enforcement actions in cases of material misreporting.”
The fix isn’t simple, but it starts with stronger oversight. Real assurance requires independence: boards, not management, should hire verifiers. Better yet, mandatory disclosure requirements with real enforcement mechanisms could level the playing field and make manipulation harder to hide.
Right now, the system relies too much on trust. Companies report their own numbers, often hire their own verifiers, and face few consequences for getting it wrong.
As pressure mounts to address climate change and more money flows toward “green” investments, the stakes for accurate emissions data keep rising. Without stronger safeguards, it’s all too easy for companies to look like they’re cleaning up their act while the real work never gets done.