ESG Regulatory Intensity and Investor Behavior: An Institutional Explanation of Rating Signals

This study examines how the intensity of ESG (Environmental, Social, and Governance) regulation influences investor behavior and asset allocation by shaping the credibility and interpretative power of ESG ratings. Through comparative case studies of companies like Unilever, Nestl, and Wahaha, as well as the investment strategies of the Norwegian Sovereign Wealth Fund (NBIM), the analysis reveals that regulatory environments significantly impact the reliability of ESG scores. In highly regulated regions (e.g., the EU), stringent disclosure requirements enhance rating transparency, enabling investors to use scores as reliable signals for risk assessment and capital allocation. Conversely, in weakly regulated markets (e.g., China), inconsistent data and voluntary disclosure frameworks reduce rating credibility, leading investors to discount scores or demand risk premiums. The findings highlight that ESG ratings are not purely technical but are deeply embedded in institutional contexts, with regulatory intensity acting as a critical determinant of their effectiveness. The study underscores the need for global regulatory harmonization to improve the universality and comparability of ESG metrics, offering insights for investors navigating cross-market ESG-driven strategies.