How Environmental Regulation Affects Corporate ESG Performance: An Empirical Study Based on the Compliance Cost Hypothesis

As global environmental issues become increasingly severe, countries have introduced a series of environmental regulation policies to promote environmental protection. Using data from Chinese listed companies, this paper explores whether environmental regulation policies enhance corporate ESG performance. The empirical findings reveal that environmental regulation policies, instead, reduce corporate ESG performance. This is because environmental regulations increase corporate tax burdens and compliance costs, negatively impact corporate revenue and R&D investments. These findings align with the compliance cost hypothesis, which posits that environmental regulations increase production costs, reduce financial performance, and consequently hinder improvements in corporate environmental efficiency. Based on this, the paper recommends that environmental protection policies should be implemented gradually, without disrupting normal business operations and R&D decision-making, to sustainably achieve improvements in corporate environmental efficiency.