I examine how mandatory ESG disclosure regulations transmit to unregulated firms through ESG rating agencies’ peer benchmarking. Using the United Kingdom’s 2017 gender pay gap (GPG) disclosure mandate with its expected positive rating consequences for regulated U.K. firms, I show that unregulated firms with similar Refinitiv ESG ratings are significantly more likely to voluntarily disclose GPG information after the mandate. The effect is more pronounced when peers are defined by ESG rating similarity rather than market capitalization and is not driven by industry affiliation alone. Consistent with ESG ratings creating competitive pressures, spillovers are strongest when U.K. peers were initially lower ranked and when unregulated firms can report relatively better GPG performance. Further analyses show that these spillovers extend to other social disclosures and generalize to the European Union’s Non-Financial Reporting Directive. Overall, the paper highlights how ESG rating structures extend the reach of disclosure regulations beyond their formal scope. Data Availability: Data are available from the public sources cited in the text

We examine how natural disasters affect the corporate environmental, social, and governance (ESG) disclosure policies of firms located close to disaster areas. We study firms located in counties neighboring those impacted by natural disasters and find that, on average, these firms increase their ESG disclosure transparency over the period subsequent to the disaster. Given that our sample firms are located outside of the area directly impacted by the disaster, the changes in disclosure transparency after the disaster are consistent with managers increasing their preference for transparency as their risk salience increases. Further, we find that firms with a higher percentage of local institutional ownership are more likely to increase ESG disclosure after experiencing nearby disasters. The findings suggest that managers strategically react to a change in investors' risk perception by increasing ESG disclosure

This paper studies whether and how environmental, social, and governance (ESG) disclosure regulations imposed on banks generate transmission effects along the lending channel. I use a setting of U.S. firms borrowing from non‐U.S. banks and exploit the staggered adoption of ESG disclosure regulations in banks’ home countries. I find that exposed borrowers of affected banks improve their environmental and social (E&S) performance following the disclosure mandate. Consistent with banks enhancing both their engagement and selection activities, affected banks impose more environmental action covenants in loan contracts, and they are more likely to terminate a borrower with bad E&S records following the regulation. Further evidence shows that the transmission effects are stronger when a disclosure regulation is well‐enforced (as indicated by a greater increase in banks’ disclosure) and among borrowers with greater switching costs. Collectively, the findings document the role of lending relationships in transmitting the real effect of ESG disclosure regulations from banks to borrowing firms

We study the equilibrium effects of the “S” dimension of ESG under imperfect competition. ESG policies are pledges made by firms that constrain managers to treat their stakeholders better than market conditions alone dictate. Moderate policies limit market power and prompt managers to be more competitive; aggressive polices backfire, both for adopting firms and intended beneficiaries. In contrast to the “shareholder primacy” paradigm, competition in ESG policies under the “stakeholder capitalism” paradigm is a panacea for market power, delivering the first-best outcome in equilibrium. We discuss drivers behind the recent rise in ESG, ESG-linked compensation, and disclosure practices

This paper examines how increased competition among environmental, social, and governance (ESG) rating agencies relates to ESG rating quality. We exploit the entry of Sustainalytics as a new ESG rating agency in 2010. We conduct a difference‐in‐differences analysis and provide three main findings. First, we find that higher competition decreases incumbents' ESG rating disagreements of the same scope. The negative relation between competition and ESG rating disagreement persists for same‐scope rating metrics not covered by Sustainalytics, suggesting that neither learning nor herding drive the results. The relationship between competition and rating disagreement strengthens for firms with more ESG disclosures, which generally require more effort to analyze. Second, we find that incumbents' ratings of ESG concerns are more strongly associated with future negative ESG news for firms additionally covered by Sustainalytics. This finding is consistent with competition improving ratings' ability to predict future negative ESG incidents. Third, we find that incumbents evaluate more difficult‐to‐measure outcome metrics for firms covered by Sustainalytics, consistent with competition inducing more effort. Overall, our findings suggest that competition serves as an implicit disciplining mechanism of ESG rating agencies' quality

We analyze survey data on ESG beliefs and preferences in a large panel of retail investors linked to administrative data on their investment portfolios. The survey elicits investors’ expectations of long-term ESG equity returns and asks about their motivations, if any, to invest in ESG assets. We document four facts. First, investors generally expected ESG investments to underperform the market. Between mid-2021 and late-2023, the average expected 10-year annualized return of ESG investments relative to the overall stock market was −2.1%. Second, there is substantial heterogeneity across investors in their ESG return expectations and their motives for ESG investing: 48% of survey respondents do not see any reason to invest in ESG, 24% are primarily motivated by ethical considerations, 22% are driven by climate hedging motives, and 6% are motivated by return expectations. Third, there is a strong link between individuals’ reported ESG investment motives and their actual investment behaviors, with the highest ESG portfolio holdings among individuals who report ethics-driven investment motives. Fourth, financial considerations matter independently of other investment motives: we find meaningful ESG holdings only for investors who expect these investments to outperform the market, even among those investors who reported that their most important ESG investment motives were ethical or hedging reasons

We study the association between environmental, social, and governance (ESG) government risk management and firm-level IPO underpricing between 2008 and 2018. Examining 7446 IPOs issued in 36 countries, we find that IPO underpricing tends to be lower in countries with higher ESG Government Ratings. When we uniquely examine the environmental, social, and governance pillars, we find that underpricing tends to be lower in countries with stronger risk management practices in each of these areas. Additional analysis indicates that the negative impact of ESG ratings on IPO underpricing is more pronounced in countries with more transparent financial disclosures, higher liability standards, and stronger shareholder protections

This paper sheds light on the impact that environmental, social and governance (ESG) corporate practice disclosure has on equity financing. We present a unique framed field experiment in which professional private equity investors competed in closed auctions to acquire fictive firms. We hence observe that corporate non-financial (ESG) performance disclosure impacts firm valuation and investment decision and we quantify to which extent. Main result is an asymmetric effect, investors reacting more to bad ESG practice disclosure than to good ESG ones. Our findings are discussed in terms of practical implications for both investors and firm managers

In recent years, firms have increasingly come under scrutiny from environmental, social, and governance (ESG) rating agencies which systematically assess and publicize ESG-related information to diverse stakeholders. This study aims to investigate whether firms exhibit a heightened incentive to avoid ESG-related regulatory violations once they come under the coverage of ESG rating agencies. Analyzing data spanning from 2000 to 2018 and considering the coverage provided by four prominent ESG rating agencies to U.S. firms, we leverage the staggered initiation and intensity of this coverage. Our findings reveal a negative correlation between ESG violations and the commencement and extent of coverage by ESG rating agencies. This relationship is particularly pronounced for firms characterized by lower levels of corporate monitoring as indicated by fewer analysts providing coverage, limited media attention, weaker ESG commitments, and less disparate ESG ratings. Taken together, our study sheds light on the monitoring role of ESG rating agencies, illustrating their significance in incentivizing managers to mitigate ESG violations

This study investigates the imbalance of ESG investing across its environmental (E), social (S), and governance (G) pillars. We find that E plays a more significant role in influencing the imbalance level, and mutual funds prioritize mitigating E risks over S and G risks, which is more pronounced in funds with higher sustainability ratings. Moreover, our findings indicate that investors respond to ESG imbalance, with the level of imbalance showing a negative impact on fund flows, especially for funds with higher sustainability ratings. However, this negative relationship is mitigated as climate change concerns increase. Furthermore, we find that political ideology plays a role in the ESG imbalance, with the imbalance of funds in blue states being more driven by lower environmental considerations compared to those in red states. Additionally, we observe that the ESG imbalance is positively associated with various fund risks. Our study offers implications for policymakers and stakeholders in the asset management industry regarding ESG investing practices