Gaming The System: Firm Strategic Responses To ESG Ratings

This study investigates how firms strategically utilize the materiality or immateriality of environmental, social, and governance (ESG) issues to manage their ESG score and offset negative ESG-related impressions. More specifically, we pull from impression management literature to suggest that when firms face reputational threats (i.e., receiving a low ESG score or facing ESG-related controversies), they strive to enhance their aggregate ESG score by improving their immaterial ESG performance, which is easier, faster, and less costly than improving performance in material ESG areas. Using a large sample of publicly traded U.S. firms ranging from 2012 to 2021, we find that firms facing poor ESG scores, especially manufacturing firms, are more susceptible to engaging in subsequent gaming tactics by improving their immaterial ESG performance in order to manage their ESG-related image without having to face significant financial trade-offs. We also find that firms facing ESG controversies are less likely to do so.