Silent No More: How Minority Shareholder and ESG Ratings Propel Environmental Innovation in China

ABSTRACT Environmental innovation (EI) plays a pivotal role in achieving sustainable development. However, the influence of minority shareholder protection (MSP) on EI remains insufficiently explored. This research investigates the impact of MSP on EI within an emerging economy, considering ESG ratings as an interactive component. By analyzing a decade dataset spanning 2013–2022, comprising 4234 firms with 33,718 observations, this study finds that MSP exerts a positive effect on EI performance. Although prevailing literature emphasizes minority shareholders' inclination toward short‐term gains, our findings suggest that strong ESG ratings help counteract this tendency, encouraging a more active engagement. Moreover, an assessment incorporating international ESG standards highlights the importance of tailoring such frameworks to the specific needs of developing economies. Firm characteristics and regulatory intensity can be the channels for MSP propelling EI performance. Regional variations in China further demonstrate that ESG ratings function most effectively as regulatory instruments in the central region, where they reinforce corporate alignment with sustainability objectives. The robustness of these conclusions is confirmed through two‐stage IV‐GMM and propensity score matching (PSM) estimations. Drawing on stakeholder and signaling theories, this study offers fresh insights into corporate governance and sustainability. It expands stakeholder theory by illustrating how MSP can harmonize with corporate sustainability goals, while signalling theory underscores ESG's role in signaling long‐term commitment. Practically, these findings emphasize the necessity of embedding ESG principles within corporate governance frameworks, recommending that policymakers enhance MSP and ESG disclosure mechanisms. Future studies could examine additional sustainability strategies across varying industrial and regulatory landscapes.