We investigate whether individuals correctly interpret corporate sustainability disclosures using a pre-registered survey experiment. We provide novel evidence that individuals can meaningfully differentiate emissions of firms along a greenness scale, even though their assessments exhibit a central tendency bias. This leads to overestimation of greenness among browner firms and underestimation among greener firms, with the bias disproportionately stronger for greener firms. We observe this bias even among finance professionals and sustainability experts. As a result, firms’ financial incentives to invest in emissions reductions may be attenuated. However, we also demonstrate that some disclosure design features improve individuals’ differentiation ability.
