ESG Ratings as a Strategic Imperative: Unraveling Their Influence on Corporate Financial Performance in China

Recent years have witnessed a growing interest in understanding the impact of environmental, social, and governance (ESG) factors on corporate financial performance. However, the findings are mixed regarding the holistic impact of ESG in the context of Chinese companies. Using the ESG ratings data of SynTao Green Finance from 2010 to 2020, we investigate how a company’s aggregate ESG score affects its financial performance, using a staggered difference-in-differences model. We find that (1) the overall ESG ratings of Chinese companies positively impact their financial performance; (2) the positive effects are achieved through alleviating agency problems, increasing R&D investment, and improving total factor productivity; (3) the effect is stronger in heavily polluting industries and state-owned enterprises; and (4) the larger a company, the more significant the influence of its ESG ratings on its financial performance. Our findings imply that companies should actively promote ESG practices through green production, active participation in social welfare-enhancing activities, and improved corporate governance systems. Moreover, the Chinese government should strongly support ESG practices, improve the ESG information disclosure system, and establish an incentive mechanism for companies’ ESG practices.