Shifting focus from end-of-pipe treatment to source control: ESG ratings’ impact on corporate green innovation

This study actively explores the pivotal role of environment, society, and governance (ESG) ratings in optimizing corporate green innovation activities as a robust response to ongoing ESG investment divestment. It provides empirical support for implementing corporate green transitions, establishing, and refining market-driven green development framework, and attaining "carbon peaking, carbon neutrality" targets. Furthermore, the research represents a groundbreaking effort to assess the influence of ESG ratings on corporate green innovation with a specific focus on pollution disposal. Specifically, examining data from Chinese A-share listed companies spanning 2011 to 2020, this study utilizes various models, including multi-period difference-in-differences (DID), event study, staggered DID, and synthetic DID (SDID). The ensuing analysis reveals that ESG ratings significantly impact the development of corporate green innovation, catalyzing the transformation of green innovation activities from end-of-pipe to source control. Notably, ESG ratings achieve this transformation by mitigating managerial myopia, enhancing the research and development (R&D) staff ratio, and alleviating financial constraints. However, the study also identifies institutional constraints and corporate digitalization as factors leading to heterogeneous effects on green innovation and its direction. These findings not only provide enhanced theoretical support but also offer empirical validation for corporations and governments looking to implement and generalize ESG ratings, facilitating a successful green transition.