Corporate peer effect on ESG performance in Europe

Abstract

This thesis studies the corporate peer effect on environmental, social and governance (ESG) performance on European companies. Existing sustainability peer effect research focuses on measuring the peer effect on more ambiguous corporate social responsibility (CSR). Less attention is given to more measurable and better defined ESG performance. Furthermore, all previous studies are conducted either on US or Chinese markets. According to investor surveys and current regulations, it seems that the ESG market in Europe is a more mature compared to the other areas creating different environment for possible peer effect.

The sample consists of 2,027 individual European companies. The sample data is retrieved from 2009 to 2022 resulting in 12,838 firm-year observations. Using multiple linear regression, the empirical results suggested negative peer effects. However, the peer effect creates an endogeneity issue because it is assumed that individual is influencing its peers and other way around. Hence, instrumental variable was added to the model. With instrumental variable in use, the results became neutral suggesting the presence of endogeneity in the baseline model which the instrument is able to correct. The robustness tests confirmed that there is no statistically significant peer effect. Instead, the results consistently showed that revenue, leverage and institutional ownership are important predictors of ESG performance.

The results did not align with the hypothesis that the peer effect would exist. Several possible explanations are offered such as the unique features of European ESG markets and ceiling effect.

These findings contribute to the existing literature by offering a contradicting view that there are not necessarily peer effects present in ESG performance in Europe. Studies in the future could use alternative definitions of ESG performance in order to further examine the topic.