Impact of peer effect on ESG and pillar scores of firms

Abstract

This paper contributes to existing literature by demonstrating that the peer effect of ESG performance as well as pillar dimension-performance positively affect the ESG behaviour of firms. We show a positive and statistically significant relationship between the ESG performance of a firm with the ESG scores of its peers. We detect that the relationship is robust after controlling for fixed effects in our regression models. Similarly, we find a positive and statistically significant relationship in the E, S and G dimensions as well. Furthermore, we conducted two supplemental tests. In the first test, we find that out of three pillars scores, the Social and Governance scores have the largest and significant peer effect on a firm’s ESG score. In the second test, we show that if a firm has an ESG score which is lower than the average scores of the peer group, then it experiences a higher peer effect than it would have if its score were above the peer average.