More sustainable, more productive: Evidence from ESG ratings and total factor productivity among listed Chinese firms

Scholars have long argued about whether improvements in environment, society, and governance (ESG) performance benefit a firm itself. To address this debate from a general perspective, we present empirical evidence on the positive correlation between a firm's ESG rating and its total factor productivity (TFP). We also explore three possible mechanisms that work within the relationship between ESG rating and TFP, in which each pillar (E, S, and G) of the ESG rating has its own function in influencing a mediator variable that eventually affects TFP. Our findings are of referential value for both policymakers and investors.

Automated summary

Scholars have long debated whether improvements in ESG performance benefit a firm itself. We provide empirical evidence showing a positive correlation between a firm's ESG rating and its TFP. We also explore three mechanisms within this relationship, where each pillar of the ESG rating influences a mediator variable that eventually affects TFP. Our findings have implications for policymakers and investors.