Digital transformation, ESG practice, and total factor productivity

Abstract Recent research provides limited knowledge about how and whether digital transformation related to environmental, social, and governance (ESG) affects the total factor productivity (TFP). To fill the gap, this study explores the impact of digital transformation on TFP based on a fixed‐effect model and the staggered difference‐in‐differences method and reveals that digital transformation can boost corporate TFP. Mechanism analysis reveals that digital transformation promotes ESG performance in companies, thereby affecting TFP. Social performance in ESG plays a mediating effect, while environmental performance plays a suppressing effect. Besides, the primary driver of TFP improvement through digital transformation lies in its direct effect, whereas the indirect effect of ESG factors is relatively limited. Our findings provide new insight into how digital transformation promotes corporate ESG and productivity.