A computational model of the competitive effects of ESG

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.

Automated summary

Environmental and social initiatives (ESG) in firms have attracted business interest, but the link between ESG investment and firm performance is unclear. A computational model is developed to clarify the competitive effects of ESG, showing that it intensifies competition when it has additional effects beyond attracting consumers. However, ESG can lead to winner-take-all dynamics and firms can strategically reduce ESG investments to soften competition. This research explains the strategic impact of ESG investments and under what conditions firms can benefit from doing good in a competitive setting.