Does Digital Transformation Enhance Firm’s ESG Performance? Evidence from an Emerging Market

ABSTRACTWe examine the impact of digital transformation on a firm’s ESG performance using data from listed firms in China. Leveraging the recent advances in textual analysis, we quantify the extent of a firm’s digital transformation. The results show that digital transformation enhances a firm’s ESG performance. Moreover, results remain robust after addressing endogeneity problems and several robustness tests. In addition, we validate potential mechanisms that the digital transformation mainly improves the ESG performance of firms by improving the level of environmental performance, corporate social responsibility, and corporate governance. To examine the economic consequence, we find that digital transformation gains more government subsidies and analysts’ attention increasing the management’s positive tone at the earnings communication conferences by improving the firm’s ESG performance. Heterogeneity analysis suggests that the effect of digital transformation on ESG performance is stronger for firms in severely polluting industries and executives with information technology experience.KEYWORDS: Digital transformationESG performancegreen innovationJEL CLASSIFICATION: G20G30 Disclosure StatementNo potential conflict of interest was reported by the author(s).Author ContributionsConceptualisation, Y.L.; Formal analysis, resources, data curation, N.T.; Writing – original draft preparation, D.W.; Revising and writing, W.H. All authors have read and agreed to the published version of the manuscript.Notes1. The 17 universities include Peking University, Tsinghua University, Beijing Normal University, Nankai University, Jilin University, Fudan University, Shanghai Jiao Tong University, Nanjing University, University of Science and Technology of China, Zhejiang University, Xiamen University, Shandong University, Wuhan University, Sun Yat-sen University, Sichuan University, Xi’an Jiaotong University, and Lanzhou University.2. CASVI, the China Alliance of Social Value Investment, is China’s first international nonprofit platform dedicated to promoting sustainable finance. It was initiated in September 2016 by the Yucheng Entrepreneur Rural Development Foundation, the Chinese Society for Social Governance Research, the China Investment Association, Jifu Investment, and the Tsinghua University Meide Public Welfare Research Institute, with the joint establishment of nearly 50 institutions. CASVI’s evaluation system implements a “pre-screening then scoring” mechanism, composed of a “screening sub-model” and a “scoring sub-model.” The “screening sub-model” is a negative list for social value assessment, which judges the evaluation target based on 5 aspects (industry problems, financial problems, significant negative events, violations of laws and regulations, special treatment) and 17 indicators in a binary manner. If the evaluation target meets any indicators, it is deemed ineligible and cannot proceed to the next step of quantitative scoring. Once the “screening sub-model” selects eligible listed companies, the “scoring sub-model” quantifies their contributions to social value. The “scoring sub-model” comes in three versions: general, finance-specific, and real estate-specific, and includes three primary indicators (objective, method, and effect), nine secondary indicators (value drive, strategy drive, business drive, technological innovation, model innovation, management innovation, economic contribution, social contribution, environmental contribution), 27 tertiary indicators, and 55 quaternary indicators.Additional informationFundingNational Natural Science Foundation of China [No. 72002043]; General Project of Philosophy and Social Sciences of Guangdong Province [GD22CGL42]; Innovation Team Project of Guangdong Provincial Department of Education [2022WCXTD020].