Competition and ESG practices in emerging markets

Henrique C. Martins



Over the last few years, there is a massive interest in corporate ESG decisions (disclosure and performance) from academia and practitioners.

To invest more in ESG practices, corporations are facing pressure from:

  • Investors (Matos, 2020),
  • Public opinion (Baldini, Dal Maso, Liberatore, Mazzi, & Terzani, 2018),
  • And peers (Cao, Liang, & Zhan, 2019)

However, antecedents and consequences of ESG practices are not well defined in the literature.

  • There is still a debate whether such practices increase or decrease firm value, for instance.


The literature has two main hypotheses to explain why managers invest in ESG practices

1) The altruist/agency conflict argument

  • It says that ESG practices are value-decreasing decisions and, thus, a form of agency conflict.

  • The main reason managers invest in such practices is altruism.

    • I.e., they pursue some form of personal reputation.


2) The strategic argument

  • It says that ESG practices are value-increasing decisions and, thus, a way to differentiate from competitors. “Escape from competition” effect.

  • The main reason managers invest in such practices is to find value in ‘non-traditional’ ways.

Literature shows conflicting evidences: Barnea and Rubin (2010), Borghesi et al. (2014); Fernández-Kranz and Santaló (2010), Flammer (2015a), and Vural-Yavaç (2020).

But in Emerging Markets

The ‘Escape from competition argument’ is less likely to hold, because:

  • Worse Investor protection, higher agency problems

  • Poor institutions, high corruption

  • Corporate practices are more opaque

Thus, stakeholders are less likely to evaluate correctly the returns of strategies based on ESG practices, even profitable ones.

Hypothesis 1: Competition is negatively associated with corporate ESG practices.

Hypothesis 2: An increase in competition decreases corporate investment in ESG practices.

Shock in Competition: Brazil 2015

  • Beginning of a presidential impeachment

  • Negative GDP growth of about 3.5%

  • Skyrocketing inflation of about 10.5%

  • Decrease in exports and imports of goods and services of around 14% and 24%, respectively.

Shock in Competition: Brazil 2015

Source: World Economic Forum.


  • Sample of 5.971 firm-year observations for 22 emerging economies (Kearney, 2012)

  • Period: 2011-2019

  • Database: Thomson Reuters Eikon

    • Financial and ESG data
  • Two types of models:

    • Either Firm FE or Country & Industry FE
    • DiD: Brazil (treatment), 21 emerging markets (control), shock in 2015.
    • Yearly propensity-score matching over the observables, with and without replacement.
  • Ind. Var.: Competition is the Herfindahl-Hirschman index


Brazil is not different than sample average


Model 1:

\(ESG_{i,t} = β_1 + β_2 × Competition_{i,t-1} + β_3 × Size_{i,t-1} + β_4 × MtB_{i,t-1} + \\ β_5 × Leverage_{i,t-1} + β_6 × Capex + RD_{i,t-1} + β_7 × ROA_{i,t-1} + \\ β_8 × Cash_{i,t-1} + ϕ_{time} + ϵ_{i,t}\)

Model 2:

\(ESG_{i,t} = β_1 + β_2 × Treated (Brazil) + β_3 × After (2015) + \\ β_4×Treated (Brazil) × After (2015) + β_5 × Size_{i,t-1} + β_6 × MtB_{i,t-1} + \\ β_7 × Leverage_{i,t-1} + β_8 × Capex + RD_{i,t-1} + β_9 × ROA_{i,t-1} + \\ β_{10} × Cash_{i,t-1} + ϕ_{time} + ϵ_{i,t}\)

Main Results (Model 1)

Main Results (Model 2 - pre-matching)

Main Results (Model 2 - post-matching)

Main Results (Robustness and Falsification)

Robustness: Excluding China

Falsification: “Shock” in Latin America Countries, instead of Brazil

Placebo tests (alternative Y’s)


  • Product market competition leads to worse ESG practices in emerging markets.
  • When competition increases, firms make trade-offs between alternative investment strategies.
  • Which penalizes those assumed as less profitable in the short-term, such as ESG-related practices.

    • Especially, E and S. Findings of G are more ambiguous.
  • Results contradict US-based findings: Fernández-Kranz and Santaló (2010), Flammer (2015b), and Leong and Yang (2020).

    • This is the interesting part of this article.
  • Managers from emerging markets decrease ESG performance to face more challenging and uncertain times, supporting the view that they invest in these practices for altruistic purposes.