From compliance to transformation: how ESG performance drives firm green transformation

Abstract

This study examines whether environmental, social, and governance performance promotes firm green transformation in China's emerging economy context, and explains how ESG engagement moves beyond symbolic legitimacy toward organizational change. It conceptualizes green transformation as a dual process that combines green innovation with efficiency upgrading, thereby linking external sustainability pressures to firms’ internal innovation capabilities and productivity improvements. By focusing on Chinese A-share listed firms, the study aims to clarify the firm-level mechanisms through which ESG performance affects independently developed green technologies, collaborative green innovation, and total factor productivity, while identifying the organizational conditions that strengthen or weaken these effects. The study uses an unbalanced panel of Chinese A-share listed firms from 2015 to 2024. Green transformation is measured through independently filed green patents, jointly filed green patents, and total factor productivity estimated using the Levinsohn–Petrin approach. Baseline fixed-effects models are employed to estimate the relationship between ESG performance and green transformation. To address selection bias and dynamic endogeneity, the analysis further applies propensity score matching combined with fixed effects and system GMM estimations. Robustness tests use alternative ESG ratings and alternative green transformation measures. Mechanism and heterogeneity analyses examine internal channels and conditional firm characteristics in greater empirical detail. The results show that higher ESG performance significantly promotes all three dimensions of firm green transformation: independent green innovation, collaborative green innovation, and productivity upgrading. These findings remain robust across matching-based fixed-effects models, system GMM estimations, alternative ESG ratings, and alternative outcome measures. Mechanism tests reveal that ESG facilitates green transformation by expanding innovation human capital, improving internal control quality, and shaping firms’ financing conditions. Heterogeneity analyses indicate that the positive effect of ESG is stronger among tech-intensive firms and small firms, suggesting that absorptive capacity and marginal legitimacy gains condition the effectiveness of ESG engagement in China’s institutional context. This study offers value by reframing ESG as an internal transformation capability rather than a disclosure or legitimacy device. It advances ESG research by unpacking three firm-level transmission mechanisms—innovation human capital, internal control quality, and financing conditions—through which ESG supports green innovation and productivity upgrading. It also broadens green transformation measurement by combining independent green patents, joint green patents, and Levinsohn–Petrin total factor productivity. Focusing on Chinese A-share firms, the study provides context-sensitive evidence from an emerging economy and shows that ESG effects vary by technological intensity and firm size, offering implications for differentiated sustainability governance and investment.