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 debated whether improvements in ESG performance benefit a firm itself. Through empirical evidence, we have shown a positive correlation between a firm's ESG rating and its TFP. We have also identified three mechanisms, related to each pillar of the ESG rating, that influence a mediator variable affecting TFP. These findings are valuable for policymakers and investors.