We show that even when firms’ sustainability claims are costless and non-verifiable, they can still retain (partial) credibility. Non-babbling equilibria arise in a standard cheap talk model when investors face uncertainty about both cash flows and the sustainability attribute. In such equilibria, sustainability claims are endogenously negatively correlated with cash flows and positively correlated with the sustainability attribute, even if the two
are ex ante independent. The negative cash-flow implication of a claim serves as an endogenous cost, enabling credible communication. We characterize how disclosure behavior and credibility vary with the level of cash-flow uncertainty and provide novel empirical evidence supporting this mechanism. Our results shed new light on firms’ communication of sustainability information in the absence of regulatory interventions.
