Digital transformation and ESG performance: evidence from China’s carbon-intensive firms

Carbon-intensive firms face systemic barriers to the environmental, social, and governance (ESG) adoption including technological gaps, cost overruns, and short-termism amid tightening decarbonization policies and digital transition pressures. This study investigates the impact of digital transformation (DT) on the ESG performance of firms, utilizing panel data from China’s A-share listed companies spanning from 2009 to 2021, analysed through fixed-effects models. Natural language processing (NLP) is employed to quantify levels of DT via textual analysis of corporate annual reports. Empirical results demonstrate that DT significantly enhances ESG performance, with pronounced effects on environmental and governance dimensions. However, its impact on the social dimension remains limited for firms operating in institutionally weaker markets. Robustness checks, including alternative variable specifications and subsample analyses, consistently validate these findings. Furthermore, in response to investors’ motivations for green investment, poor stock market performance and stricter financing constraints can significantly amplify the positive effect of DT on the ESG performance of carbon-intensive firms. The policy implications emphasize three key priorities: (1) implementing zone-specific digitalization subsidies to promote DT adoption, (2) developing industry ESG frameworks that align with China’s dual-carbon goals, and (3) establishing financial mechanisms that incentivize green technology research.