Agent-Based Analysis of Green Disclosure Policies and Their Market-Wide Impact on Firm Behavior

Green disclosure policies are designed to help firms communicate their environmentally friendly practices to investors. While most research has focused on the effects of these policies at the individual firm level, their influence within a system of multiple firms remains largely unexamined. To address this gap, we develop an agent-based model to simulate market dynamics among firms with varying levels of environmental performance and strategic responses. Using Empirical Game-Theoretic Analysis, we investigate how the costs associated with becoming greener and investors' valuation of these efforts shape equilibrium outcomes and the prevalence of green firms in the market. Our findings reveal that changes in the cost of green upgrades significantly influence firms' strategic choices and alter the equilibrium behavior of the other firms. Additionally, we analyze the effects of different green disclosure policies and find that under more relaxed policies, firms are more willing to incur into higher upgrade costs. Furthermore, we propose a two-stage disclosure policy that incentivizes all types of firms to improve their green practices, leading to broader adoption of sustainable energy solutions across the market.