Does the Classified Reform of Chinese State-Owned Enterprises Alleviate Environmental, Social and Governance Decoupling?

Accurate disclosure and proactive engagement in ESG practices are essential for achieving high-quality economic development, particularly as China addresses significant challenges during its reform journey. The Classified Reform of State-Owned Enterprises (CRSOE) is a strategic initiative by the Chinese government aimed at fostering this development. Our study leverages the implementation of the CRSOE as an exogenous shock, employing the difference-in-differences approach to assess the policy’s governance impact on ESG decoupling from the perspective of ownership heterogeneity. The policy was found to alleviate ESG decoupling, particularly pronounced among SOEs with special functions. The governance effect is achieved by reducing the aspiration–performance gap. Specifically, the policy effectively narrows the disparity between a company’s actual performance and the expected performance based on the industry average, thereby mitigating ESG decoupling. However, the policy’s impact can be weakened by factors such as political connections among executives and media attention. Furthermore, the CRSOE effectively addresses greenwashing practices within ESG decoupling, with a particularly strong effect on SOEs that fail to disclose ESG information in alignment with Global Reporting Initiative (GRI) standards. These findings highlight the importance of understanding the broader implications and underlying mechanisms of the policy. Therefore, building on the assessment of how the CRSOE policy impacts ESG decoupling, we also examine the mechanisms through which this policy operates and how its effectiveness varies under different conditions of heterogeneity. By extending the application of principal-agent theory and performance feedback theory, our research suggests that policymakers should prioritize market-driven reforms for fully competitive SOEs and promote a stronger emphasis on non-financial goals. Additionally, it is essential to mitigate the undue influence of political promotions on the management of all SOEs.