["Corporate Social Responsibility and Environmental Management, EarlyView. ", "\nABSTRACT\nHow do innocent firms navigate negative reputational spillovers from industry peer misconduct? We propose that non‐culpable firms leverage corporate social responsibility (CSR) as a costly‐to‐fake signal of intrinsic quality to distance themselves from tainted peers. Using a panel of Chinese listed firms (2010–2021), we document that regulatory disclosures of peer violations trigger a significant increase in substantive CSR commitments. This strategic differentiation is amplified when firms face severe information asymmetry or rely heavily on reputational capital. Furthermore, we demonstrate that this surge is not mere window dressing: the substantive enhancement is significantly stronger among firms with robust governance structures and higher intrinsic value. Economically, this active engagement facilitates market screening and improves the overall information environment. By imposing prohibitive mimicking costs, it effectively buffers innocent firms against proximity contagion, thereby preserving firm value. Ultimately, our study challenges the traditional conformity paradigm in peer effects, validating CSR as a credible separating mechanism during industry‐wide reputational crises.\n"]