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Digital transformation, innovation capability, and ESG performance

Author

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  • Liu, Qiong
  • Wang, Hairong

Abstract

This study investigates how digital transformation (DT) affects environmental, social, and governance (ESG) performance through innovative capabilities in Chinese A-share listed companies from 2010 to 2022. Analyzing 31,323 firm-year observations, we demonstrate that DT directly and indirectly improves ESG performance through breakthrough and incremental innovation routes. Breakthrough innovations offer revolutionary sustainability solutions through invention patents; meanwhile, incremental innovations enable continuous improvement of sustainable practices. DT has a stronger effect on social and governance dimensions than on environmental performance, with a greater impact in non-pollution industries and state-owned enterprises. Findings underscore how different innovation types translate digital capabilities into improved ESG performance in various contexts.

Suggested Citation

  • Liu, Qiong & Wang, Hairong, 2025. "Digital transformation, innovation capability, and ESG performance," Finance Research Letters, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:finlet:v:78:y:2025:i:c:s1544612325004295
    DOI: 10.1016/j.frl.2025.107166
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    More about this item

    Keywords

    Digital transformation; ESG performance; Breakthrough innovation; Incremental innovation; Sustainability;
    All these keywords.

    JEL classification:

    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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