UNRAVELLING THE INTERPLAY BETWEEN ESG-LINKED EXECUTIVE COMPENSATION, BOARD CLIMATE OVERSIGHT, AND CARBON DISCLOSURE

Abstract

This study explores whether ESG-linked executive compensation influences carbon reporting by China's A-share listed firms and whether this influence is mediated by board-level climate governance. Based on stakeholder theory, agency theory, and upper echelons theory, the study suggests that ESG-linked executive compensation positively affects carbon disclosure quality and that board-level climate governance mediates this relationship, reinforcing the effect of ESG-linked incentives on disclosure practices. The study of firm-level panel data spanning 2021 to 2023 indicates that companies with ESG-linked executive compensation tend to have credible and transparent carbon disclosures. Furthermore, ESG-linked executive compensation pushes companies to establish board climate oversight, and board climate oversight helps the quality of disclosure outcomes. The findings show that board climate oversight functions as a mediator that connects ESG-linked executive compensation with carbon disclosure practices. The mediation results show that ESG-linked executive compensation affects carbon reporting through two separate channels. Board climate oversight is seen as the governing mechanism that connects the two channels. The results of this research suggest that investors, regulators and boards can consider readjusting their climate practices in response to new regulatory requirements.