From ethics to efficiency: Understanding the interconnected dynamics of ESG performance, financial efficiency, and cash holdings in China

Abstract

This study examines the impact of Environmental, Social, and Governance (ESG) principles on firm efficiency and cash holdings in China's non-financial sector from 2010 to 2022. Through fixed effect and system GMM regression analyses, it finds that higher ESG scores enhance operational efficiency, leading to decreased cash reserves. The research highlights that sustainable practices contribute to ethical standing and financial resilience, encouraging firms to integrate ESG strategies with financial objectives. The corporate firms are encouraged to view sustainable practices not merely as compliance measures but as strategic imperatives that contribute to both ethical standing and financial resilience. By exploring the linkage between sustainable practices and financial strategies, this study enriches the dialogue on sustainable finance and responsible corporate governance, demonstrating the financial benefits of ESG adherence.