A computational model of the competitive effects of ESG

Abstract

Environmental and social initiatives within firms, commonly grouped under the ESG term, have attracted significant business interest. However, the mechanism that links ESG investment to firm performance is unclear. We develop a computational model that helps clarify the competitive effects of ESG. In our model, ESG investment attracts consumers, but it can have additional effects on companies, such as reducing production costs, increasing product value, or both. Computational experiments show that ESG intensifies competition when it has such additional effects in addition to attracting consumers. However, ESG can lead to a winner-take-all dynamic in which a firm with an initial advantage dominates the market. Moreover, firms can use strategic disclosure of information to reduce their ESG investments, softening competition. This research contributes to the ESG literature by explaining the strategic impact of firms’ ESG investments and the conditions under which firms can do well by doing good in a competitive setting.

Sustainable Pathways: ESG Disclosure Performance and Optimization in China

“…Stakeholder theory posits that addressing stakeholder needs and showcasing corporate commitment to environmental and social matters bolster customer loyalty [58], confer a competitive edge [59], and enhance corporate value [34,35,60]. Drawing from information asymmetry theory, ESG disclosure supplements traditional corporate reporting, filling gaps by providing insight into strategic direction, operations, management, culture, and brand reputation, thereby objectively portraying a firm's long-term sustainability potential.…”

From Digital to AI Transformation for Sustainability

“…AI transformation can play an essential enabling role in achieving a firm's sustainability goals, either environmental or socioeconomic, and can create value for all stakeholders. Moreover, an emphasis on sustainability creates innovation incentives [28] and new funding sources for AI transformation.…”

Environmental, social and governance performance and green transformation strategies for enterprises: Improving technical efficiency or expanding technological boundaries

“…Although existing studies provide a valuable foundation, research gaps remain that require further exploration. First, previous studies have discussed the positive effects of ESG on reducing production costs, increasing product value, and promoting green innovation [ 8 , 9 ], as well as the impact of company or industry factors on green total factor productivity (TFP) [ 10 ], but there is still a lack of research linking the two together. In the context of dual carbon goals and sustainable development, this study links ESG and green TFP to explore how green governance can empower high-quality development, and whether the market regulation generated by ESG can strengthen the sustainable development momentum of enterprises.…”