1. Introduction
Digital transformation has become an inevitable choice for companies to enhance their competitiveness, innovation, profitability, and sustainable development. The process of digital transformation involves transforming traditional business models, processes, and operations into digital ones. Through digital transformation, companies achieve automation or partial automation of production processes; in addition, they enable intelligent workflows, improve production efficiency and capacity, and effectively enhance their competitiveness [
1,
2,
3]. Technologies such as big data and artificial intelligence provide more accurate business insights and predictions during the digital transformation process, thus enabling innovation in production processes and operational modes [
4]. By optimizing processes and innovating business models through digital transformation, companies can reduce costs by minimizing material waste and lowering management expenses [
5]. Digital transformation also enhances user experience, improves customer satisfaction and loyalty, and achieves increased sales and profits for the company. The dual effect of reducing costs and increasing profits enhances a company’s profitability [
6]. Meanwhile, every company is part of an industrial value chain, and the degree of digital transformation in the value chain and regional networks can drive the digital transformation of enterprises. The digital transformation of leading enterprises within the value chain further enhances the overall digital transformation level of production across society. To maintain sustainable development, companies must adapt to the digital advancement in industrial value chains and networks [
7]. Therefore, choosing digital transformation is a necessary choice for companies.
Enterprises aim to maximize their economic benefits as their primary goal. However, with the increasing demand for sustainable development, there is growing attention from various sectors toward the environmental, social, and governance (ESG) performance of companies. There is now a stronger emphasis on companies disclosing their ESG information. Despite the existence of the principal–agent relationship in modern corporate systems, where managers pursue their economic interests and shareholders aim to maximize shareholder value, there is often limited consideration given by managers and shareholders to the environmental responsibilities of companies, particularly in the absence of mandatory policies or investor oversight [
8,
9]. As the global environment deteriorates and the concept of sustainable development becomes more prevalent, governments and investors are paying increasing attention to corporate social responsibility and other related aspects [
10,
11,
12,
13,
14,
15]. Corporate social responsibility encompasses various aspects, including fulfilling social and environmental responsibilities. During the process of fulfilling corporate social responsibility, companies may engage in practices such as “greenwashing” [
16], where they falsely portray themselves as environmentally responsible. Consequently, corporate governance becomes a relevant aspect to consider. As a result, a more systematic focus is placed on a company’s performance in terms of environment, social issues, and corporate governance, which is referred to as ESG performance [
17]. Moreover, governments around the world have successively introduced policies regarding ESG information disclosure. Currently, these policies are gradually shifting from voluntary to mandatory, and international organizations have also developed “international standards” for ESG disclosure by listed companies. For example, in January 2020, the U.S. Financial Services Commission passed the 2019 ESG Information Disclosure Simplification Act, which mandates eligible securities issuers to clearly describe the relevant content of specified ESG indicators in the written materials provided to shareholders and regulatory agencies. For another example, in November 2022, the European Council passed the “Corporate Sustainability Reporting Directive”, which expanded the coverage of ESG disclosure requirements and increased the requirements for corporate ESG information disclosure.
According to the economic and financial literature, there is a certain degree of inconsistency between corporate digital transformation and ESG goals. Different viewpoints exist regarding the impact of digital transformation on ESG. The essence of digital transformation lies in enterprises adopting more advanced technologies and operating models to achieve higher economic benefits. Therefore, companies have sufficient internal motivation to implement digital transformation. Conversely, achieving ESG goals is an activity with strong externalities, and, from an economic perspective, it may not be cost-effective for companies [
18]. Hence, companies lack sufficient motivation to promote ESG practices. Although there is a certain degree of inconsistency between the two in terms of goals, most scholars believe that digital transformation can help improve a company’s ESG performance [
19,
20,
21]. Wang and Esperança [
22] and Lu, et al. [
23] have verified the incentivizing effect of digital transformation on corporate ESG performance from the perspectives of listed companies and SMEs, respectively. At the same time, different scholars have proposed different views on the specific pathways of digital transformation’s impact on ESG and its influence on ESG sub-indicators. Fang, et al. [
24] conducted research based on companies’ financial reports and concluded that digital transformation mainly affects corporate ESG performance by reducing agency costs and enhancing reputation. Digital transformation only affects the governance score (G) and social score (S) of a company without significantly improving the environmental score (E). On the other hand, Yang and Han [
25] focused on discussing the moderating role of financing constraints in the impact of digital transformation on ESG. They believed that digital transformation has a significant positive effect on a company’s environmental score (E) and social score (S), but it does not have a significant impact on governance score (G). Some researchers have studied the green innovation effect of corporate digital transformation and concluded that it can incentivize green innovation, thereby improving environmental performance [
26,
27]. However, some scholars have argued that digital transformation has negative impacts on a company’s environmental, social, and governance performance. In terms of environmental governance, Lange, et al. [
28] believe that digital transformation has both energy-saving effects and energy-consumption effects. Overall, the energy-consumption effects outweigh the energy-saving effects, thus making it difficult for digital transformation to improve environmental performance by reducing energy consumption. Regarding social governance, Niehoff [
29] suggests addressing the negative social effects of digital transformation, such as unemployment and increased energy consumption, as these negative effects can disrupt a company’s sustainable development. In terms of corporate governance, digital transformation may lead to increased social and time pressures on employees, which can harm their health and safety, thus hindering the implementation of sustainable human resource management practices in companies [
30,
31]. Overall, scholars have different opinions on the impact of digital transformation on ESG, and a unified consensus has not yet been reached. Additionally, there are many potential mechanisms and pathways that have not been fully explored and require further in-depth research.
This article’s marginal contributions are reflected in the following aspects: Firstly, the benefits in conducting econometric tests to examine the impact of digital transformation on ESG and its various dimensions. Existing research on the impact of digital transformation on ESG has produced inconsistent conclusions. This article not only quantitatively tests the impact of digital transformation on ESG, but it also empirically analyzes the effects of digital transformation on each dimension of ESG. This approach can provide a comprehensive explanation for the inconsistent conclusions regarding the impact of digital transformation on ESG. Overall, based on the findings of this article, digital transformation has a positive impact on ESG, but the impact on different dimensions of ESG varies. Secondly, it explores the mechanisms through which digital transformation influences the corporate fulfillment of ESG responsibilities, thereby enriching and expanding the research on the non-economic effects of corporate digital transformation. Existing studies on the effects of corporate digital transformation have primarily focused on economic effects by considering the goals of digital transformation. However, ESG encompasses not only economic aspects, but also social and corporate governance aspects. Therefore, this article enriches and expands the research on the non-economic effects of corporate digital transformation. Thirdly, the benefits in analyzing the heterogeneity of corporate digital transformation behavior under goal differentiation. The goals of digital transformation and ESG alignment may not be fully consistent, and companies exhibit different decision-making behaviors based on their specific attributes (such as capital intensity, differences in energy consumption, etc.). This heterogeneity contributes to the varied impact of digital transformation on ESG.
The subsequent chapters of this article are arranged as follows:
Section 2 presents the research design, which includes the theoretical framework and basic assumptions regarding the influence of corporate digital transformation on ESG. It also covers the model design, an explanation of relevant variables, and data sources.
Section 3 focuses on the empirical analysis of the impact of digital transformation on ESG. It includes an analysis of how corporate digital transformation affects ESG and its various dimensions, as well as robustness tests to ensure the reliability of the findings.
Section 4 delves deeper into the analysis of the impact of digital transformation on ESG. This section explores the mechanisms through which digital transformation influences ESG and investigates heterogeneity in this relationship across different companies based on their specific characteristics.
Section 5 concludes the article, summarizing the key findings, implications, and potential areas for further research.
3. Quantitative Analysis of the Impact of Digital Transformation on ESG
3.1. The Impact of Digital Transformation on ESG
To evaluate the impact of digital transformation on ESG performance, this study employed Equation (1) for regression analysis. In this analysis, we excluded the control variables and fixed time effects.
As shown in
Table 2, digital transformation significantly enhances the ESG performance of listed companies. This conclusion is consistent with the research findings of most scholars [
42]. Columns (1)–(2) of
Table 1 depict the cases of controlling only individual fixed effects and controlling both individual fixed effects and time-fixed effects without including control variables. The results consistently demonstrated that digital transformation significantly improves ESG performance, thus validating Hypothesis 1 of this study. For every one-unit increase in the level of digital transformation, the ESG performance is expected to increase by 0.025 units.
The findings indicate that digital transformation plays a significant role in boosting a company’s ESG performance, thus suggesting a certain level of consistency between digital transformation and enhanced ESG performance in practice. The goal of digital transformation in companies is to improve efficiency in various aspects, thereby leading to better outcomes and progress in areas such as energy utilization and corporate management [
43], which results in improved ESG performance. Moreover, implementing ESG practices requires companies to invest human and material resources, and digital transformation can effectively enhance the operational conditions of companies, thus providing better conditions for implementing ESG practices. The digital production model emphasizes efficiency and collaboration, not only within the company, but also in terms of improved efficiency in cooperation between companies. For instance, digital technologies can facilitate digital collaboration along the industrial chain, promote the implementation of a circular economy model [
44], and enable effective resource recycling and reuse, thereby aligning with the principles of sustainable development. In conclusion, despite the differing objectives of digital transformation and the implementation of ESG practices in companies, companies can still drive improvements in ESG performance by accelerating their digital transformation efforts.
As shown in
Table 3, there are differences in the impact of digital transformation on the sub-dimensions of corporate ESG performance. Digital transformation has a significant positive influence on the environmental (environment) and social (social) dimensions. This is the same as Yang and Han’s viewpoint, but different from Fang, Nie, and Shen’s views [
23,
24]. For every 1 unit increase in digital transformation, the environmental performance (environment) improved by 0.075 units, and the social performance (social) improved by 0.054 units. The coefficient for the impact of digital transformation on corporate governance (governance) was found to be positive but not significant.
In terms of environmental performance, on the one hand, digital transformation reduces the consumption of office resources through the digitization of office work; on the other hand, digital transformation helps enterprises better monitor energy utilization through data analysis tools, improve energy utilization efficiency, and reduce negative environmental impacts. Therefore, digital transformation has an improved effect on the environmental performance of enterprises. In terms of social performance dimensions, digital transformation provides a wider range of communication and interaction channels, thus helping enterprises better communicate and cooperate with stakeholders, which helps with achieving higher levels of social responsibility and employee welfare. Therefore, digital transformation has an improved effect on the social performance of enterprises. In terms of corporate governance, digital transformation enhances the overall level of corporate governance by providing greater transparency and data visualization tools, thereby strengthening internal control and risk management, as well as improving the quality of corporate governance, accountability, and disclosure standards. Digital transformation provides more tools and opportunities for enterprises to establish stronger governance frameworks. From a theoretical perspective, the impact of digital transformation on the three sub-dimensions of ESG may be positive, including the impact on corporate governance dimensions. However, from the empirical results, it can be seen that the impact of digital transformation on the three sub-dimensions of ESG was not the same. Specifically, it had a significant improvement effect on environmental and social performance, while the impact on corporate governance was not significant. Here are some explanations for this phenomenon.
There could be two reasons for the differences in the impact of digital transformation on the sub-dimensions of corporate ESG performance. First, stakeholders tend to place more emphasis on environmental and social performance when assessing corporate ESG performance, while overlooking governance. Enterprises tend to strive for a higher reputation, so when implementing ESG practices, they will pay more attention to improving environmental and social performance [
45], and, when conducting digital transformation, they will also pay more attention to combining these two aspects. Therefore, when implementing ESG practices, companies are more likely to focus on improving environmental and social aspects, as well as prioritizing their alignment with digital transformation. Second, the influence of digital transformation on corporate governance is limited. Corporate governance encompasses aspects such as governance structure, business ethics, and compliance management. Digital transformation positively impacts internal management within the company, which may affect the management structure, but it is difficult to influence the board structure or the behavior of major shareholders. Additionally, optimizing internal management does not have a decisive impact on the business ethics of a company. In summary, digital transformation still has some influence on corporate governance, but this influence may be relatively weak, thus leading to insignificant coefficients. Third, this may be a manifestation of the heterogeneity of the impact of digital transformation on the sub-dimensions of ESG. The content involved in the sub-dimensions of ESG varies, and, in the process of digital transformation, environmental and social performance are more easily affected. This suggests that enterprise managers should pay attention to the differences between the sub-dimensions when implementing ESG practices.
3.2. Robustness Tests on the Impact of Digital Transformation on ESG
To examine the robustness of the empirical results, this study conducts robustness tests using three different approaches.
First, four control variables were added to address the issue of omitted variables: dual-role (dual), management ownership ratio (mshare), leverage ratio (lev), and whether the company is in a loss position (loss). Among them, dual-role (dual) and loss were qualitative variables. If the chairman and CEO are the same person, dual-role (dual) takes a value of 1; otherwise, it is 0. If the company has a negative net profit in the current year, the loss takes a value of 1; otherwise, it is 0.
Second, the explanatory variables were replaced, and regressions were conducted again to verify whether the observed empirical results were dependent on specific variables. In this study, the logarithm of the frequency of digital transformation terms in the MD&A sections of annual reports (digital_freq) were used as a new proxy variable to examine the impact of digital transformation on corporate ESG performance.
Finally, the instrumental variable method was employed to address potential endogeneity issues in the model. To ensure the accuracy of the results, this study selected instrumental variables from two different perspectives. The first was the average level of digital transformation among the firms in the same industry and region. Digital transformation among the firms in the same industry and region may have a spillover effect, but it should not directly affect the ESG performance of individual companies. The second instrumental variable was the logarithm of the number of mobile phone users in the region. The digital environment in which a company operates may influence its motivation for digital transformation, but it should not directly affect its ESG performance.
The results of the robustness tests are presented in
Table 4.
As shown in
Table 4, the regression results in this study are robust. Column (1) in
Table 4 shows the baseline regression results after adding the control variable set; column (2) illustrates the baseline regression results with the replacement of explanatory variables; and columns (3) and (4) present the baseline regression results, achieved by using instrumental variable methods. Regardless of the testing approach used, it can be observed that digital transformation has a significant positive impact on corporate ESG performance.
5. Conclusions
The alignment between digital transformation and enhancing corporate ESG (environmental, social, and governance) performance may exhibit some degree of inconsistency in objectives, yet practical implementation suggests a certain level of congruity. This study focuses on a sample of 1422 publicly listed Chinese companies for the period 2012–2021, in which the impact and mechanisms of digital transformation on corporate ESG performance were empirically examined. The empirical results demonstrate that, firstly, digital transformation significantly improves corporate ESG performance, which is a conclusion that remains robust even after considering omitted variable and endogeneity issues. Furthermore, the positive effect of digital transformation on ESG performance is primarily concentrated in the areas of environmental (E) and social (S) performance, with no significant impact on corporate governance (G). Secondly, the mechanism analysis revealed that digital transformation enhances corporate ESG performance through the optimization of human capital structure, improved operational and managerial efficiency, and incentivizing green innovation. Lastly, heterogeneity analysis suggests that capital-intensive firms, high-tech firms, and enterprises with lower carbon emissions benefit more prominently from digital transformation in terms of improving ESG performance. The conclusion of this article has certain practical guidance significance for enterprise management. Firstly, the conclusion of this article provides ideas for enterprise managers on how to promote digital transformation and ESG practices, in which it is suggested that they can combine the two and fully utilize the positive effects of digital transformation. Secondly, the conclusion of this article can help business managers understand how digital transformation affects ESG performance, improves management efficiency, and reduces the cost of trial and error in practice. Finally, the conclusion of this article can guide enterprise managers to fully integrate their situation and learn from each other when promoting digital transformation and ESG practice.
Based on the aforementioned research findings, this study proposes the following recommendations: The uncertainty of policies can affect the decision making of social units, thereby resulting in uncertain consequences [
49,
50]. If a country does not have clear policies or ESG policies related to enterprise digital transformation, then enterprises may not pay much attention to this, and the development trend of enterprise digital transformation and ESG practice will also be difficult to determine. To ensure the smooth progress of enterprise digital transformation and ESG practice, governments should adopt a multi-faceted approach by first formulating relevant policies to expedite the process of digital transformation within corporations, as well as encouraging the integration of digital technologies with ESG practices. This can foster the synergy between the internally driven digital transformation and the externally impactful ESG practices. Secondly, while current ESG disclosure practices in various countries rely predominantly on voluntary compliance, the probability of “Greenwashing” by corporations may significantly rise once mandatory ESG disclosure becomes more globally widespread. Therefore, regulatory bodies in different countries should not only establish ESG disclosure regulations, but they should also develop corresponding review processes to ensure the authenticity of corporate ESG disclosures. Lastly, there is a need to promote ESG principles vigorously, and to guide corporations to proactively engage in ESG practices, thereby facilitating sustainable economic development. At the micro-level, companies should strive to incorporate digital technologies into various aspects of their business operations to optimize human capital structure, improve operational and managerial efficiency, and enhance the level of green innovation, thus enhancing ESG performance. Furthermore, the digital economy, digital technology, and digital products are playing an increasingly important role in economies and societies; thus, digital transformation is an inevitable choice for enterprises [
51,
52,
53,
54,
55]. Companies should consider their strengths and weaknesses, adopt digital transformation and ESG practices that align with their specific circumstances, and integrate the two in a synchronized manner to maximize the spillover effects of digital transformation on sustainable development.
This article uses panel data to study the relationship between enterprise digital transformation and ESG performance, and it concludes that digital transformation is beneficial for improving ESG performance. Further research was conducted on the mechanism path and heterogeneity, thereby providing a reference for subsequent research in terms of methods and conclusions. However, due to limitations in data, methods, and length, there are still many areas that remain to be addressed in this study, which provides direction for future research. Here are some shortcomings of this article and some prospects for future research. First, this article takes into account the particularity of financial statements when selecting samples, but it excludes financial companies. This is because they are a special type of company worthy of a separate study [
56,
57]. Second, this article did not consider the dynamic impact between digital transformation and ESG when studying the relationship between the two. Future research can further focus on the hysteresis or non-linear impact of digital transformation on ESG, as well as the threshold effect. Third, this article proves that digital transformation can improve the ESG performance of enterprises. It also explains which properties of enterprises may affect the role of digital transformation. Further, we can consider which digital technologies have a more obvious effect on improving ESG performance, and how enterprises can achieve it. During digital transformation, the spillover effect of digital technology on ESG improvement should be maximized. Fourth, the research in this article shows that digital transformation has no significant positive impact on corporate governance. This may be because digital transformation not only brings positive effects, but it also brings new risks and challenges to company management. Future research could discuss the heterogeneity of the impact of digital transformation on the sub-dimensions of ESG based on this approach. Finally, policy factors are a significant factor that affects the ESG performance of enterprises. This article has less consideration for policy factors, and future research can discuss how policy uncertainty affects the ESG performance of enterprises. Furthermore, the impact of digital transformation on ESG performance can be studied.