Does Carbon Performance Mediate the Link Between ESG Performance and Corporate Tax Avoidance?

This study examines the relationship between environmental, social, and governance (ESG) performance and corporate tax avoidance and investigates whether carbon performance serves as a transmission mechanism linking the two. Using an international panel of 15,840 firm-year observations from 1584 listed firms across 52 countries during the 2015–2023 period, the analysis employs random-effects generalized least squares (GLS), mediation analysis, instrumental variable (2SLS), and System Generalized Method of Moments (GMM) estimations. The results show that stronger ESG performance is associated with lower book–tax differences (BTD), indicating reduced corporate tax avoidance. Carbon performance is positively associated with ESG performance and partially mediates the ESG–tax avoidance relationship, explaining approximately 14% of the total effect. Additional analyses reveal that the Environmental pillar is the primary driver of this mediation mechanism, while the relationship is stronger among firms with higher governance quality. The findings remain robust to alternative measures of tax avoidance and sustainability performance, lagged specifications, instrumental variable estimation, and dynamic panel models. Overall, the study provides international evidence that environmental performance represents an important, though partial, pathway through which ESG engagement promotes more responsible corporate tax behavior, offering practical implications for policymakers, investors, and corporate managers seeking to strengthen sustainability, transparency, and fiscal accountability.