CBR Briefing #28

• Companies are often rated on issues that investors, consumers, and employees care about, such as the environment. The threat of a poor environmental score could prompt firms to take action. But besides this direct effect, research by Chicago Booth’s Amanda J. Sharkey and University of Utah’s Patricia Bromley suggests that ratings have spillover effects, with firms reducing toxic emissions even more when more of their product-market peers are rated.
• The researchers used environmental ratings of manufacturing firms, and data that firms report to the government about their pollution levels, to track how toxic chemical emissions—such as lead and mercury—of both rated and unrated firms changed as a function of a company having more rated peers.
• They find that the more peers that were rated in an industry, the greater a rated firm’s drop in toxic emissions. Stakeholders have more options to choose from when more firms are rated, which could intensify the pressure to act. More rated firms could also motivate others to emulate their peers’ techniques in lowering emissions.
• A firm’s rating and the context in which it operates plays an important role. Firms rated “poor” only reduced their emissions in response to rated peers when they were in either highly regulated or very competitive industries (see chart). Moreover, in highly regulated industries, ratings prompted even unrated firms to reduce their toxic emissions.

Click here to download this briefing as a PDF.