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.
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