IDEAS home Printed from https://ideas.repec.org/a/bla/bstrat/v33y2024i5p4108-4129.html

ESG ratings and green innovation: A U‐shaped journey towards sustainable development

Author

Listed:
  • Cunyi Yang
  • Conghao Zhu
  • Khaldoon Albitar

Abstract

This study examines the relationship between corporate ESG ratings and green innovation based on data from Chinese A‐share listed companies for the period between 2011 and 2022. The findings suggest a “U”‐ shaped relationship between ESG ratings and green innovation. Companies with lower ESG ratings (referred to as “bad” companies) tend to focus on improving their corporate governance and operational conditions, often at the expense of green innovation. However, as companies improve their ESG ratings, they increasingly view green innovation as a key growth area. This relationship is particularly evident in companies with low profitability and high operational risks. Additionally, we explore the impact of corporate ESG ratings on different types of green patents. The study finds that “bad” companies can mitigate the negative impact on green innovation through collaborative efforts, while non‐inventive green innovations, they benefit from independent research and development. Furthermore, the study examines the role of government subsidies and executive compensation in influencing this relationship. The results show that government subsidies can both positively and negatively affect green innovation, depending on the company's operational status and ESG rating. The results provide valuable insights for companies, investors, and policymakers regarding the significant role of ESG scores in promoting green innovation and suggest strategies to enhance corporate sustainability performance.

Suggested Citation

  • Cunyi Yang & Conghao Zhu & Khaldoon Albitar, 2024. "ESG ratings and green innovation: A U‐shaped journey towards sustainable development," Business Strategy and the Environment, Wiley Blackwell, vol. 33(5), pages 4108-4129, July.
    • Handle: RePEc:bla:bstrat:v:33:y:2024:i:5:p:4108-4129
    DOI: 10.1002/bse.3692
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/bse.3692
    Download Restriction: no
    File URL: https://libkey.io/10.1002/bse.3692?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Zhang, Dongyang & Meng, Li & Zhang, Jintao, 2023. "Environmental subsidy disruption, skill premiums and ESG performance," International Review of Financial Analysis, Elsevier, vol. 90(C).
    2. He, Yu & Zhao, Xiaoling & Zheng, Huan, 2023. "How does the environmental protection tax law affect firm ESG? Evidence from the Chinese stock markets," Energy Economics, Elsevier, vol. 127(PA).
    3. Robert F Engle & Stefano Giglio & Bryan Kelly & Heebum Lee & Johannes Stroebel, 2020. "Hedging Climate Change News," The Review of Financial Studies, Society for Financial Studies, vol. 33(3), pages 1184-1216.
    4. Han Long & Gen-Fu Feng & Chun-Ping Chang, 2023. "How does ESG performance promote corporate green innovation?," Economic Change and Restructuring, Springer, vol. 56(4), pages 2889-2913, August.
    5. Eun-Hee Kim & Thomas P. Lyon, 2015. "Greenwash vs. Brownwash: Exaggeration and Undue Modesty in Corporate Sustainability Disclosure," Organization Science, INFORMS, vol. 26(3), pages 705-723, June.
    6. Lily H. Fang & Josh Lerner & Chaopeng Wu, 2017. "Intellectual Property Rights Protection, Ownership, and Innovation: Evidence from China," The Review of Financial Studies, Society for Financial Studies, vol. 30(7), pages 2446-2477.
    7. Zhou, Bing & Zeng, Xiaoyan & Jiang, Lu & Xue, Bing, 2020. "High-quality Economic Growth under the Influence of Technological Innovation Preference in China: A Numerical Simulation from the Government Financial Perspective," Structural Change and Economic Dynamics, Elsevier, vol. 54(C), pages 163-172.
    8. Isabell Lenz & Hauke A. Wetzel & Maik Hammerschmidt, 2017. "Can doing good lead to doing poorly? Firm value implications of CSR in the face of CSI," Journal of the Academy of Marketing Science, Springer, vol. 45(5), pages 677-697, September.
    9. Simona Mateut, 2018. "Subsidies, financial constraints and firm innovative activities in emerging economies," Small Business Economics, Springer, vol. 50(1), pages 131-162, January.
    10. He, Feng & Ding, Cong & Yue, Wei & Liu, Guanchun, 2023. "ESG performance and corporate risk-taking: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 87(C).
    11. Arvid O. I. Hoffmann & Stefanie Kleimeier, 2021. "Financial disclosure readability and innovative firms' cost of debt," International Review of Finance, International Review of Finance Ltd., vol. 21(2), pages 699-713, June.
    12. Broadstock, David C. & Chan, Kalok & Cheng, Louis T.W. & Wang, Xiaowei, 2021. "The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China," Finance Research Letters, Elsevier, vol. 38(C).
    13. Francisco Bravo & Nuria Reguera‐Alvarado, 2019. "Sustainable development disclosure: Environmental, social, and governance reporting and gender diversity in the audit committee," Business Strategy and the Environment, Wiley Blackwell, vol. 28(2), pages 418-429, February.
    14. Sara De Masi & Agnieszka Słomka‐Gołębiowska & Claudio Becagli & Andrea Paci, 2021. "Toward sustainable corporate behavior: The effect of the critical mass of female directors on environmental, social, and governance disclosure," Business Strategy and the Environment, Wiley Blackwell, vol. 30(4), pages 1865-1878, May.
    15. Stijn Claessens, 2006. "Corporate Governance and Development," The World Bank Research Observer, World Bank, vol. 21(1), pages 91-122.
    16. Samuel Drempetic & Christian Klein & Bernhard Zwergel, 2020. "The Influence of Firm Size on the ESG Score: Corporate Sustainability Ratings Under Review," Journal of Business Ethics, Springer, vol. 167(2), pages 333-360, November.
    17. Gillan, Stuart L. & Koch, Andrew & Starks, Laura T., 2021. "Firms and social responsibility: A review of ESG and CSR research in corporate finance," Journal of Corporate Finance, Elsevier, vol. 66(C).
    18. Jinhua Cui & Hoje Jo & Haejung Na, 2018. "Does Corporate Social Responsibility Affect Information Asymmetry?," Journal of Business Ethics, Springer, vol. 148(3), pages 549-572, March.
    19. Wang, Juxian & Ma, Mengdi & Dong, Tianyi & Zhang, Zheyuan, 2023. "Do ESG ratings promote corporate green innovation? A quasi-natural experiment based on SynTao Green Finance's ESG ratings," International Review of Financial Analysis, Elsevier, vol. 87(C).
    20. Jo Thori Lind & Halvor Mehlum, 2010. "With or Without U? The Appropriate Test for a U‐Shaped Relationship," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(1), pages 109-118, February.
    21. Kostant, Peter C., 1999. "Exit, voice and loyalty in the course of corporate governance and counsel's changing role," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 28(3), pages 203-246.
    22. Guangyou Zhou & Lian Liu & Sumei Luo, 2022. "Sustainable development, ESG performance and company market value: Mediating effect of financial performance," Business Strategy and the Environment, Wiley Blackwell, vol. 31(7), pages 3371-3387, November.
    23. Yuming Zhai & Zhenghuan Cai & Han Lin & Ming Yuan & Ye Mao & Mingchuan Yu, 2022. "Does better environmental, social, and governance induce better corporate green innovation: The mediating role of financing constraints," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(5), pages 1513-1526, September.
    24. Amir Barnea & Amir Rubin, 2010. "Corporate Social Responsibility as a Conflict Between Shareholders," Journal of Business Ethics, Springer, vol. 97(1), pages 71-86, November.
    25. Caroline Flammer, 2015. "Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach," Management Science, INFORMS, vol. 61(11), pages 2549-2568, November.
    26. Richard F. J. Haans & Constant Pieters & Zi-Lin He, 2016. "Thinking about U: Theorizing and testing U- and inverted U-shaped relationships in strategy research," Strategic Management Journal, Wiley Blackwell, vol. 37(7), pages 1177-1195, July.
    27. Dan Daugaard, 2020. "Emerging new themes in environmental, social and governance investing: a systematic literature review," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(2), pages 1501-1530, June.
    28. Liu, Hongxun & Zhang, Zihan, 2023. "The impact of managerial myopia on environmental, social and governance (ESG) engagement: Evidence from Chinese firms," Energy Economics, Elsevier, vol. 122(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Du, Anna Min & Sun, Zhennan & Li, Zhongyuan & Boateng, Agyenim, 2025. "Green business performance and innovation willingness: Exploring the impact of ecosystem-oriented business models," International Review of Financial Analysis, Elsevier, vol. 105(C).
    2. Yang, Runze & Wu, Junwei & Yang, Cunyi & Albitar, Khaldoon, 2024. "Far-sighted through mitigating risk: Directors and officers liability insurance and corporate ESG performance," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    3. Chenyang Meng & Yu Peng & Jiaxin Zhang & Jinjin Chen, 2025. "How Fintech Impacts Enterprises’ Digital–Green Synergy," Sustainability, MDPI, vol. 17(12), pages 1-19, June.
    4. Zhang, Hua & Lai, Jie & Guo, Zheng, 2025. "When greenwashing meets ESG: Exploring the role of third-party ESG ratings in corporate greenwashing behavior," Journal of Business Research, Elsevier, vol. 200(C).
    5. Iftikhar, Kainat & Bagh, Tanveer & Shabbir, Muhammad Nadir, 2025. "The dichotomy of corporate litigation risk in shaping ESG disclosure: Does green innovation matter?," Research in International Business and Finance, Elsevier, vol. 75(C).
    6. Xiong, Zhiqiao & Liu, Jianjiang & Shi, Daqian & Hu, Jin, 2025. "From chains to gains: How green supply chain management drives green innovation in Chinese manufacturing," International Review of Financial Analysis, Elsevier, vol. 107(C).
    7. Gan, Zhongxin & Yusupov, Nurmukhammad, 2025. "Supply chain ESG and green innovation at midstream firms: An integrated approach with both supplier and buyer sides," Research in International Business and Finance, Elsevier, vol. 78(C).
    8. Costantiello, Alberto & Drago, Carlo & Arnone, Massimo & Leogrande, Angelo, 2024. "Regional Research Intensity and ESG Indicators in Italy: Insights from Panel Data Models and Machine Learning," MPRA Paper 124185, University Library of Munich, Germany.
    9. Fang Ling & Hongxian Zhen & Chao Wang & Jingyi Li & Jingjing Zhao, 2025. "Environmental protection strategic alliance and enterprise green innovation," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 12(1), pages 1-16, December.
    10. Yang Liu & Sameer Kumar & Huiqing Liu & Shun Li & Ziyun Zhou, 2025. "ESG performance, digital transformation, and green innovation," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 12(1), pages 1-19, December.
    11. Li, Tian & Qi, Feng, 2025. "Fiscal reform and green innovation: Evidence from China's local debt management reform," Finance Research Letters, Elsevier, vol. 76(C).
    12. Zhang, Hua & Lai, Jie, 2024. "Greening through ESG: Do ESG ratings improve corporate environmental performance in China?," International Review of Economics & Finance, Elsevier, vol. 96(PC).
    13. Iftikhar, Kainat & Bagh, Tanveer & Shabbir, Muhammad Nadir, 2025. "Corporate reputation gains from green innovation: Moderating effects of subsidies and eco-friendly products," Research in International Business and Finance, Elsevier, vol. 80(C).
    14. Sun, Xian & Xiong, Xiaoyan, 2025. "ESG performance and corporate innovation," Research in International Business and Finance, Elsevier, vol. 76(C).
    15. Liu, Xiaoqian & Jia, You & Zhu, Conghao & Wang, Chang’an & Yao, Jian, 2025. "Policy-driven innovation: Does the renewable energy development initiative foster corporate innovation in renewable energy technologies?," International Review of Financial Analysis, Elsevier, vol. 102(C).
    16. Wang, Yuhan & Hao, Jinxing & Guo, Hui & Xian, Maoyang & Liao, Qiang, 2025. "How green strategic alliances enhance green innovation: Mechanisms and evidence in China," Finance Research Letters, Elsevier, vol. 77(C).
    17. Chen Lin & Li Fei & Zhao Longfeng & Xie Guanghua, 2026. "How Bonding and Bridging Ties Shape Green Innovation: Evidence from Director Networks in China," Entrepreneurship Research Journal, De Gruyter, vol. 16(1), pages 157-194.
    18. Fan, Rui & Xu, Yuxuan & Yu, Liying & Qiu, Ran, 2025. "Sustainability needs trust: The role of social trust in driving corporate ESG performance," Economic Analysis and Policy, Elsevier, vol. 86(C), pages 1492-1509.
    19. Yu, Jungang & Ma, Xiaohua & Niu, Yanmei, 2025. "Judicial efficiency, corporate innovation investment, and financing efficiency," Finance Research Letters, Elsevier, vol. 86(PF).
    20. Liu, Zhouding & Jackson, Ana, 2026. "The interplay of technological innovation, human capital and civil liberties in advancing economic complexity and sustainable growth," Technology in Society, Elsevier, vol. 84(C).
    21. Zhonglian Luo & Jie Li & Yufei Gan & Chunlan Li & Shiyu Cao, 2025. "How Analyst Attention Promotes Digital Transformation in Chinese Firms: The Moderating Role of CEOs’ Green Experience," Sustainability, MDPI, vol. 17(8), pages 1-21, April.
    22. Yamin Xie, 2025. "Digital Inclusive Finance Drives Green Innovation: Pathways and Mechanisms for Sustainable Development," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 16(4), pages 14867-14906, October.
    23. Zhang, Jingxuan & Wu, Yanghui & Lin, Lin, 2025. "Government subsidies, corporate ESG ratings, and green innovation," Finance Research Letters, Elsevier, vol. 84(C).
    24. Yu, Lianchao & Zhu, Lele & Dong, Jinting, 2026. "The dark side of environmental judicial specialization: Corporate labor income share in China," Economic Modelling, Elsevier, vol. 155(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ann Susan Thomas & Ambili Jayachandran & Ajithakumari Vijayappan Nair Biju, 2024. "Strategic mapping of the environmental social governance landscape in finance – A bibliometric exploration through concepts and themes," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(5), pages 4428-4453, September.
    2. Caterina Lucarelli & Sabrina Severini, 2024. "Anatomy of the chimera: Environmental, Social, and Governance ratings beyond the myth," Business Strategy and the Environment, Wiley Blackwell, vol. 33(5), pages 4198-4217, July.
    3. Ge Ge & Xiang Xiao & Zhenzhu Li & Qinghui Dai, 2022. "Does ESG Performance Promote High-Quality Development of Enterprises in China? The Mediating Role of Innovation Input," Sustainability, MDPI, vol. 14(7), pages 1-24, March.
    4. Junjie Wang & Yan Chen & Sanfa Wang, 2024. "Exploring the relationship between corporate ESG performance and corporate violation: Based on the fraud triangle theory," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(6), pages 5606-5626, November.
    5. Peng, Shengnan & Liu, Chan & Wang, Ze & Ye, Zihan & Sun, Xialing & Tan, Zhanglu, 2024. "The impact of the carbon reduction policy effectiveness on energy companies' ESG performance," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    6. Wang, Zhen & Chu, Erming & Hao, Yukai, 2024. "Towards sustainable development: How does ESG performance promotes corporate green transformation," International Review of Financial Analysis, Elsevier, vol. 91(C).
    7. Haibo Sun & Tonghuan Bai & Youqing Fan & Zhonglu Liu, 2024. "Environmental, social, and governance performance and enterprise sustainable green innovation: Evidence from China," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(4), pages 3633-3650, July.
    8. Li, Jiansheng & Song, Siyang & Wang, Yan, 2026. "Green bond issuance and corporate ESG performance—Evidence from the perspective of unlabeled green bonds in China," Pacific-Basin Finance Journal, Elsevier, vol. 95(C).
    9. Liang, Yuchao & Tan, Qi & Pang, Jun, 2024. "Bless or curse, how does extreme temperature shape heavy pollution companies' ESG performance?-Evidence from China," Energy Economics, Elsevier, vol. 131(C).
    10. Alan Kai Ming Au & Yi-Fan Yang & Huan Wang & Rui-Hong Chen & Leven J. Zheng, 2023. "Mapping the Landscape of ESG Strategies: A Bibliometric Review and Recommendations for Future Research," Sustainability, MDPI, vol. 15(24), pages 1-26, December.
    11. Chen Xu & Yu He, 2025. "The Impact of ESG Performance on Green Technology Innovation: A Moderating Effect Based on Digital Transformation," Sustainability, MDPI, vol. 17(7), pages 1-22, April.
    12. Yin, Zhujia & Deng, Rantian & Xia, Jiejin & Zhao, Lili, 2024. "Climate risk and corporate ESG performance: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).
    13. Chen, Zhixiong & Sugiyama, Kohei & Tasaka, Kazuyuki & Kito, Tomomi & Yasuda, Yukihiro, 2024. "Impact of environmental, social and governance initiatives on firm value: Analysis using AI-based ESG scores for Japanese listed firms," Research in International Business and Finance, Elsevier, vol. 70(PA).
    14. Ji, Ruibing & Zhang, Shengling & Cao, Wenxuan & Hao, Yu & Wang, Nuo, 2025. "Data assets, supply chain spillovers, and corporate ESG development — Evidence from Chinese listed companies," Structural Change and Economic Dynamics, Elsevier, vol. 75(C), pages 880-894.
    15. Manzhi Liu & Jia Lu & Chen Zhao & Jie Luo & Qiyao Liu & Hui Wang & Shuting Fang & Yaxin Yang, 2025. "Antecedents and consequences of environmental, social, and governance: A bibliometric analysis based on the Web of Science database," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 32(1), pages 984-1001, January.
    16. Tingting Hu & Kun You & Char-Lee Lok, 2025. "State ownership, political connection and ESG performance," Risk Management, Palgrave Macmillan, vol. 27(1), pages 1-33, February.
    17. Zeng, Yongliang & Zhao, Xiangfang & Zhu, Yiwen, 2023. "Equity incentives and ESG performance: Evidence from China," Finance Research Letters, Elsevier, vol. 58(PC).
    18. Tiantian Meng & Dan Lu & Danni Yu & M. H. Yahya & Mohd Ashhari Zariyawati, 2024. "Is executive compensation aligned with the company’s ESG objectives? Evidence from Chinese listed companies based on the PSM-DID approach," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 11(1), pages 1-15, December.
    19. Cheng, Louis T.W. & Cheong, Tsun Se & Wojewodzki, Michal & Chui, David, 2025. "The effect of ESG divergence on the financial performance of Hong Kong-listed firms: An artificial neural network approach," Research in International Business and Finance, Elsevier, vol. 73(PA).
    20. Fu, Changluan & Yu, Chenyang & Guo, Mengting & Zhang, Lin, 2024. "ESG rating and financial risk of mining industry companies," Resources Policy, Elsevier, vol. 88(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:bstrat:v:33:y:2024:i:5:p:4108-4129. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1099-0836 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.