Strategic Insights From Voluntary and Mandatory ESG Evaluations in a Competitive Market

Environmental, social, and governance (ESG) considerations are garnering increasing interest from various stakeholders. Nevertheless, the impact of ESG evaluation policies-whether voluntary or mandatory-are complex, particularly in competitive markets. Consequently, this study develops a game-theoretic model to investigate the propensity of competing manufacturers to invest in ESG initiatives. This study demonstrates that ESG evaluations reduce information asymmetry regarding ESG levels in competitive dynamics. However, this phenomenon may lower manufacturers' incentives to invest in ESG. Interestingly, this study finds that although mandatory ESG evaluations boost the overall profitability of competing manufacturers, they do not invariably lead to enhanced ESG outcomes.