Can Corporate Site Visits Improve ESG Ratings?

Abstract

As environmental, social, and governance (ESG) becomes an increasingly popular criterion for investment screening, drivers of ESG performance have attracted attention from a wide range of stakeholders. In this study, we test whether corporate site visits can improve ESG ratings using a unique dataset of site visits from Chinese listed firms. We find that corporate site visits can lead to improved ESG performance for listed firms, which is robust even after adding a series of control variables, alternative model specifications, and accounting for endogeneity issues. This effect is attributed to the mediating effects of ESG information disclosure and corporate internal control quality. We also find that the more ESG-related discussion during site visits the better managers learn to improve ESG performance of their firms. Furthermore, there is evidence that the positive effect of site visits on ESG are more pronounced among firms that are not audited by Big Four accounting firms, not cross-listed, and when Qualified Foreign Institutional Investors are involved. Overall, this paper contributes to the literature by providing complementary evidence that site visits are an important platform for communicating between investors and corporate management, which can have profound implications on incentivizing managers to deliver better ESG performance. Our findings also offer practical and policy implications to regulators on the promotion and implementation of ESG in listed firms.