Tepper School doctoral student Nilsu Uzunlar's research shows that sustainability policy designs, such as emissions disclosure metrics and circular economy mandates, shape corporate environmental behavior and supply chain investment strategies.
Every company today is under pressure to go green. Pressure alone does not determine outcomes, but policies do. Regulators have been introducing a range of policy tools from emissions disclosure requirements to import tariffs to recycling mandates. The ambition behind these policies is clear, but that doesn’t guarantee results. Sustainability policies are not one-size-fits-all, and how a policy is designed can matter just as much as what it is trying to achieve.
My ongoing research studies how specific policy design choices shape firm behavior in ways that are not always straightforward.
Over the past decade, investors have become one of the most powerful forces pushing firms toward greener operations. In joint work with Professors Alan Scheller-Wolf and Sridhar Tayur, I study how environmental pressure from equity and debt markets has led many publicly traded companies to reduce emissions, adopt cleaner production technologies, and disclose their environmental performance more transparently. This is largely a positive development. But the story is more complicated than it first appears.
A key question that has received surprisingly little attention is: what metric should firms use when disclosing their emissions? There are two common approaches. Under an absolute emissions framework, firms report their total emissions. Under an emissions intensity framework, firms report their emissions per unit of output. These may sound like technical accounting choices, but our research shows they have significant consequences for how firms actually behave.
Sustainability policies are not one-size-fits-all, and how a policy is designed can matter just as much as what it is trying to achieve.
Consider what happens when a firm faces strong pressure from investors to reduce its environmental impact. Under an absolute emissions framework, the market penalizes high total emissions, which means that producing more output, even with cleaner technology, increases the firm’s total reported emissions and can hurt its market valuation. This creates an unintended tension: firms may respond by reducing production rather than investing in cleaner technology. The environmental outcome improves on paper, but not necessarily in the way policymakers intended. This is particularly important for jurisdictions whose economies rely on carbon-intensive sectors, such as energy, cement, steel, or other heavy manufacturing.
The intensity framework works differently. Because the metric captures emissions per unit of output, firms can improve their reported performance by investing in cleaner production technology while maintaining or even growing output. Our research finds that for firms facing intermediate levels of investor pressure, the intensity framework can create a ‘’sweet spot’’ that encourages investment in emission reduction without penalizing firms for producing more.
We also find that under voluntary disclosure, firms may sometimes choose not to publicize their emission-reduction investments at all, a phenomenon known as greenhushing. This can happen when the costs of reporting outweigh the reputational benefits, leading firms to quietly do the right thing without getting credit for it. Understanding when and why greenhushing (underreporting or hiding sustainability efforts) occurs matters for regulators who rely on transparency as a tool for accountability.
Overall, the absolute metric tends to work better at preserving firm value when investor pressure is high, while the intensity metric is more likely to drive investment in cleaner technology. Mandatory disclosure is a widely used tool, but the details of how it is designed can shape whether it drives environmental progress or simply shifts how emissions appear on paper.
In joint work with Professors Alan Scheller-Wolf and Siddharth Prakash Singh (Tepper School PhD, currently at University College London), we study a separate but related challenge that arises when trying to build more circular and domestically resilient supply chains for clean energy technologies. Solar panels and wind turbines require critical materials — such as silicon, lithium, and rare earth elements — that are often imported from a small number of foreign suppliers. This creates vulnerability to price shocks and geopolitical disruptions, as recent years have made clear. One promising solution is to recover these materials from end-of-life products rather than relying entirely on imported virgin material.
To encourage such recovery, policymakers have two main tools at their disposal: recovery mandates, which require firms to recover a minimum share of material from end-of-life products, and tariffs on foreign material imports, which make domestic recovery relatively more
attractive by raising the cost of the alternative. Both approaches can work — but our research shows they work in different ways and under different conditions.
The key insight is that the effectiveness of each instrument depends heavily on the characteristics of virgin-material prices in global markets. When prices tend to be high, tariffs are particularly effective at encouraging recovery, since the cost penalty they impose on imports is most consequential when those imports are already expensive. When prices tend to be low, recovery mandates may be more effective, since they directly require firms to recover material regardless of how cheap imports are. Focusing only on which tool to use, without accounting for market conditions, may lead to policies that are less effective than intended.
The design of a policy matters as much as its intent. Both disclosure metrics and circularity instruments can work — but which one works better depends on the specific context. Choosing a policy tool without accounting for market conditions or the level of investor pressure a firm faces may lead to outcomes that fall short of what was intended.
For business leaders, understanding the policy environment is as important as responding to it. Whether a firm faces an absolute or intensity-based disclosure requirement shapes what operational decisions make sense. Similarly, whether a government relies on mandates or tariffs to encourage recycling affects how firms should think about their recovery investments.
The details of policy design are not just a regulatory concern; they are a business strategy concern. As sustainability regulation continues to expand across jurisdictions, firms that understand how specific policy instruments work will be better positioned to make good operational and investment decisions — and in ensuring that the push for a more sustainable economy delivers on its promise.
Uzunlar, Nilsu and Scheller-Wolf, Alan Andrew and Tayur, Sridhar R., Greenness and its Discontents: Operational Implications of Investor Pressure (February 16, 2024). Available at SSRN: https://ssrn.com/abstract=4729492 or http://dx.doi.org/10.2139/ssrn.4729492
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