Peer Effects in ESG Ratings: Evidence from Gender Pay Gap Disclosures

Abstract

Through peer benchmarking, ESG rating agencies promote competition among firms for better
ratings. I investigate whether mandatory firm transparency triggers imitation behavior by rated peer
firms. Following a plausibly-exogenous increase in ESG disclosures, the introduction of mandatory
gender pay gap reporting in the United Kingdom, I document that unregulated firms with comparable ESG ratings are more likely to adopt similar disclosures voluntarily. This effect is amplified when mandated peers are rated lower ex-ante, suggesting ESG rating competition. Interestingly, the effect is present among peers selected by the ESG rating agency and not subsumed by peers along other dimensions (industry or market capitalization). Firms’ response is not limited to direct imitation, but extends to wider social-pillar disclosures. Overall, the findings indicate that the impact of disclosure mandates extends beyond the de-jure reach of the regulation and highlight the role of ESG rating agencies in fostering the global convergence of ESG disclosure practices.

Keywords: ESG ratings, benchmarking, peer effects, voluntary disclosure, gender pay gap disclosure

JEL Classification: M14, M48, D70