Environmental Performance Rating and Disclosure : An Empirical Investigation of China???s Green Watch Program

Environmental performance rating and disclosure has emerged as an alternative or complementary approach to conventional pollution regulation, especially in developing countries. However, little systematic research has been conducted on the effectiveness of this emerging policy instrument. This paper investigates the impact of a Chinese performance rating and disclosure program, Green Watch, which has been operating for 10 years. To assess the impact of Green Watch, the authors use panel data on pollution emissions from rated and unrated firms, before and after implementation of the program. Controlling for the characteristics of firms and locations, time trend, and initial level of environmental performance, the analysis finds that firms covered by Green Watch improve their environmental performance more than non-covered firms. Bad performers improve more than good performers, and moderately non-compliant firms improve more than firms that are significantly out of compliance. The reasons for these different responses seem to be that the strengths of incentives that the disclosure program provides to the polluters at different levels of compliance are different and the abatement costs of achieving desired levels of ratings are different for different firms.