Climate change risk disclosure and non-GAAP earnings

Climate change risk disclosure conveys a company's commitment to environmental protection, which creates intrinsic value for stakeholders. We posit that managers may report low non-GAAP earnings to account for the ongoing expenses linked to these enduring commitments. Non-GAAP earnings serve to exclude unusual and non-recurring earnings, reflecting a company's business sustainability. Our analysis supports the conjecture of lower non-GAAP earnings for firms disclosing climate change risk. The negative relationship is more pronounced for firms with strong corporate governance, including low incentive compensation and boards with effective monitoring (low co-opted boards). Furthermore, we find lower aggressive non-GAAP earnings for firms disclosing climate change risk. We also find evidence that firms disclosing climate risk and lowering non-GAAP earnings do not obfuscate financial reports but instead have more environmental expenditure. Our results indicate that managers leverage non-GAAP earnings as a mechanism to communicate their long-term environmental enhancement commitments to shareholders.