How corporate business similarity affects ESG Performance?

The effect of competitive pressure on ESG may diverge. On the one hand, when competitive pressure increases, firms have incentives to increase moral capital by fulfilling ESG to hedge against risks, on the other hand, the decline in firm performance due to competition may weaken firms' ability to fulfill ESG. Research on this issue has important theoretical and practical significance. Based on data from Chinese listed companies from 2010 to 2022, we used business similarity as a proxy for competitive pressure and find it significantly improves corporate ESG performance, i.e., the risk hedging effect of ESG dominates. Corporate financing constraints negatively moderate this effect. The ability of firms to transfer risk increases as their business becomes more decentralized, which in turn weakens this effect. Conversely, when firms have more concentrated sales, their ability to transfer risk diminishes, amplifying this effect. Our study explores the measure of competitive pressure and business similarity, also expands the research on the impact of business characteristics on the non-economic consequences of firms and ESG motivations. • We construct a measure of business similarity through cutting-edge text analysis tools. • The firms’ business similarity can enhances ESG performance. • ESG plays the role of moral capital against risk and can drive firms to engage in ESG when business similarity reduces the level of corporate risk-taking. • Corporate financing constraints negatively moderate this effect. The ability of firms to transfer risk increases as their business become more decentralized, which in turn weakens this effect. Conversely, when firms have more concentrated sales, their ability to transfer risk diminishes, thereby amplifying this effect.