ABSTRACT Environmental, social and governance (ESG) rating divergence undermines the informational efficiency of capital markets and amplifies systemic vulnerability. To address this concern, we investigate the effect of institutional investor network centrality on firms' ESG rating divergence. Empirical results reveal that institutional investors with higher network centrality can mitigate corporate ESG rating divergence. Mechanism analysis identifies three channels through which this effect operates: improving corporate willingness to disclose ESG information, promoting standardised ESG information disclosure and decreasing strategic ESG disclosure. Heterogeneity tests indicate that the mitigating effect is especially pronounced for firms without ISO certification, non‐state‐owned firms, and those facing limited public scrutiny or weak governmental environmental regulation. Further analysis suggests that institutional investors' governance incentives arise from concerns about potential losses associated with stock price crash risk and liquidity risk. Overall, our results highlight institutional investor network governance as an additional governance channel, particularly salient in settings with weak formal oversight and a fragmented information environment.
Wang et al. (Mon,) studied this question.