How Can Green Energy Technology Innovations Improve the Carbon-Related Environmental Dimension of ESG Rating?

ESG ratings aim at improving the socioeconomic standards of workers as well as the governance and environmental footprint of companies. These three factors are interconnected, meaning an improvement in one of them leads to an improvement in all of them. This study introduces ESG ratings, discusses their implementation in developed countries (the USA and Singapore), discusses their implementation in developing countries (China), and finally highlights the relationship that exists between green innovation and ESG ratings. This paper demonstrates that the transparency provided by ESG ratings has led to stable growth in the financial sector of companies, which can be seen from the stock valuations of companies in both the USA and China. Furthermore, ESG ratings can be seen influencing the level of environmental sustainability provided by companies, with an increase in the green innovation sector as evidenced by an increase in the number of green patents and green tech startups in these countries. However, several hurdles face ESG ratings and threaten its effects, such as “green washing,” and the lack of regulations and transparency in developing countries specifically. This paper mostly focuses on the environmental criteria of the ESG rating, explaining how countries are encouraging green innovations and investments in companies that are going green, which can be through seeking energy efficiency, investment in renewable energy, and reducing carbon footprint.