Strategic value of peer-driven ESG practices: decomposing ESG into its core components

Purpose Firms do not make environmental, social and governance (ESG) decisions in isolation; they operate within industries where competitors’ sustainability practices can shape strategic choices. However, despite growing evidence of peer effects on corporate policies, little is known about whether and how peer firms influence a firm’s ESG engagement. This study aims to examine peer-driven ESG behavior and investigates whether these effects differ across the ESG dimensions. Design/methodology/approach Using a comprehensive sample of US publicly listed firms from 2005 to 2021, the authors examine how industry peers’ ESG performance influences a firm’s own ESG practices. Rather than treating ESG as a single measure, the authors decompose it into its ESG components to identify differences in peer effects across ESG dimensions. Findings The authors find strong evidence that firms adjust their ESG practices in response to their industry peers. Peer effects are particularly pronounced for environmental and social practices, while the effect for governance is weaker. Further analysis suggests that firms respond to peer ESG practices partly to remain competitive and improve access to external financing. The results are robust to alternative specifications and tests. Research limitations/implications The US-focused analysis points to several directions for future research. Although the theory is based on the USA, the theory-driven mechanisms – peer benchmarking, legitimacy concerns and responses to stakeholder pressure – may vary across institutional contexts. Comparative studies across regions, including Europe, Asia and emerging markets, could examine how regulation, culture and stakeholder expectations shape peer-driven ESG adoption. Future research may extend the sample beyond 2021 to capture recent ESG developments and test the persistence of peer effects. Scholars could also explore regulatory change, political risk, industry mandates and governance peer effects using more granular components such as board structure or shareholder rights. Practical implications This research underscores the value of peer benchmarking in ESG practices. Managers should monitor peer actions – especially in environmental and social areas – to guide ESG decisions, enhance reputation and improve capital access. Firms can use peer-comparison dashboards, align ESG targets with industry leaders, link ESG metrics to executive incentives and disclose progress to signal competitive positioning. From a policy perspective, the weaker diffusion of governance practices suggests a greater need for formal regulation, disclosure mandates and enforcement. Policymakers, rating agencies, consultants and investors can apply these insights to design frameworks, refine ratings and evaluate firms’ ESG alignment within their industries. Originality/value This study extends the ESG literature by showing that corporate ESG engagement is shaped not only by firm-specific incentives and external stakeholders but also by the behavior of industry peers. By decomposing ESG into its core components, the authors further demonstrate that peer influence is not uniform across ESG dimensions. These findings highlight peer effects as an important mechanism through which ESG practices spread across firms and industries.