Abstract
Environmental, social and governance (ESG) standards can stimulate firms' green development by improving the external information landscape. This study investigates the mechanisms through which ESG affects firms' green transformation in China. We identify the positive effects of ESG performance on firms' green innovation and total factor productivity. ESG performance refines the configuration of green innovation and stimulates substantive and ‘source reduction’ green innovation, a linchpin of firms' sustainable development. The mechanisms behind our findings include alleviating financing constraints, mitigating agency problems, and increasing research and development (R&D) investment. Interestingly, the positive effects of ESG performance on firms' green transformation are more pronounced in highly polluting and competitive industries, synergistically complementing formal environmental regulation. Overall, this paper provides a novel vantage point from which to study corporate green transformation and offers practical insights for formulating and improving market-based frameworks for green development.
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