Greening through ESG: Do ESG ratings improve corporate environmental performance in China?

Abstract

Environmental, social, and governance (ESG) ratings matter for corporate green development as they can shape companies' sustainable efforts. However, the influence of third-party ESG ratings as an emerging informal environmental regulation on corporate environmental performance (CEP) remains understudied in China. To identify this causality, we exploit the exogenous variation of SynTao Green Finance's ESG ratings and conduct a difference-in-differences (DID) estimation. Utilizing panel data of Chinese A-share listed companies from 2008 to 2023, we find that ESG ratings can induce improvements in CEP, along with increased positive environmental scores and decreased negative environmental scores. We document three feasible mechanisms for this CEP impact: alleviated financial constraints, heightened media attention, and enhanced green innovation. We further investigate the heterogeneous effects and find that ESG ratings significantly improve CEP for companies with high executive shareholding and more female directors, companies in low-competitive industries, and those located in cities with high levels of economic development. Our findings contribute to existing studies on the determinants of CEP and offer novel evidence of the efficacy of ESG ratings as an informal institution in promoting corporate green development.