Conference Agenda

Asymmetric implementation of environmental regulations across countries creates opportunities for carbon leakage, allowing firms in regulated jurisdictions to shift emissions-intensive activities abroad. This paper examines whether mandatory Environmental, Social, and Governance (ESG) disclosure policies can mitigate leakage by influencing supply chain behavior. I study the European Union’s Non-Financial Reporting Directive (NFRD), which requires large EU firms to report ESG metrics across their supply chains. Using OECD data combining Inter-Country Input-Output (ICIO) tables with International Energy Agency (IEA) emissions data from 2010–2020, I construct an industry-level measure of exposure to the NFRD for non-EU exporters. I find no evidence that exposure leads to changes in ESG disclosure, carbon performance, or local emissions in non-EU countries. However, exposure is associated with a substantial decline in carbon embedded in exports to the EU driven not by cleaner production, but by a reduction in export values. Additional results show that more exposed industries, particularly in middle-income countries, redirect exports away from the EU and toward less regulated markets. These findings suggest that ESG disclosure mandates may reduce carbon leakage at the border, but largely through trade reallocation rather than upstream decarbonization.