Learning from peers : information spillover on ESG investment

Abstract

I examine whether the adverse ESG incidents of industry peers affect focal firms’ ESG investment. When firms’ industry peers suffer from adverse ESG incidents, the focal firms perceive the risk to themselves through information spillover and are expected to take proactive actions such as making ESG investment to prevent potential damage. I exploit ESG-related job postings as the proxy for ESG investment because setting up job positions and hiring employees is an important investment decision for a firm. I find that firms increase ESG investment after their industry peers are exposed to negative ESG incidents. This relation is stronger when: (1) their peers share high similarity with focal firms, (2) the peers and the focal firms are commonly held by eco-conscious investors, or the focal firms are stakeholder oriented, (3) the peer firms are more transparent in ESG. Consequently, I find a decline in focal firms’ greenhouse gas emissions and the mitigation of their climate change risk following the increase in ESG investment triggered by peers’ negative incidents. Overall, I contribute to the information spillover literature that firms appear to learn important knowledge from their peers’ adverse ESG incidents and manage the potential risk by investing in ESG human capital. Note: This is the final version submitted by the graduate with approval.