ESG Ratings and Green Innovation

Round 1

Reviewer 1 Report (New Reviewer)

Comments and Suggestions for Authors

Abstract:

The results presented are quite broad. They can be summarized in the following key points:

a. ESG ratings promote green innovation

b. ESG ratings help investors identify companies with sustainable development potential

c. ESG ratings encourage increased investments in environmental protection

d. ESG ratings encourage increased investments in social responsibility

e. ESG ratings encourage increased investments in corporate governance

f. ESG ratings help alleviate financing pressures

g. ESG ratings attract more media attention

h. ESG ratings correct managerial myopia

 

These are eight distinct points derived from this work. Kindly filter them so that only the results of your specific study are included here.

1.      Introduction

The first paragraph of the introduction lacks proper citations, with only the first sentence being correctly referenced.

The same issue occurs in several parts of the paragraphs throughout the introduction. A suggestion would be for the authors to better structure the text, making the paragraphs more concise and focused.

The introduction section should tell a clear and engaging story, concluding with a well-defined statement of the study’s objectives and methods. It is recommended that this section be rewritten to improve clarity and coherence.

 

1.      Research hypotheses

The hypotheses presented in this section do not align with the results outlined earlier in the abstract. Here, the authors only analyze whether ESG ratings improve outcomes related to corporate green innovation, as well as quality.

Additionally, the distinction between the terms "outcome" and "quality" is not clear. It would be helpful to clarify these terms and how they differ in the context of the study to avoid any confusion.

2.      Research design

This section could benefit from a clearer presentation of the methodology, possibly through a diagram or figure. It would be helpful to outline the steps taken in defining the research design and provide guidance on how other researchers might replicate this study, potentially focusing on different aspects.

As for the other elements of the paper, no further recommendations are deemed necessary.

The main concern, however, is conceptual: the inferences about the impact of ESG ratings on green innovation are quite broad. How do the authors ensure that the scope of the paper justifies these cause-and-effect inferences, especially considering the subsequent policy recommendations for governments and companies? Clarifying this would strengthen the overall argument.

Author Response

Responses to reviewers

Reviewer1

Abstract:

The results presented are quite broad. They can be summarized in the following key points:

1. ESG ratings promote green innovation
2. ESG ratings help investors identify companies with sustainable development potential
3. ESG ratings encourage increased investments in environmental protection
4. ESG ratings encourage increased investments in social responsibility
5. ESG ratings encourage increased investments in corporate governance
6. ESG ratings help alleviate financing pressures
7. ESG ratings attract more media attention
8. ESG ratings correct managerial myopia

These are eight distinct points derived from this work. Kindly filter them so that only the results of your specific study are included here.

Thanks.

We rewrite the abstract.

“This study examines the impact of ESG ratings on corporate green innovation, selecting A-share listed companies in China from 2012 to 2022 as the research sample. Using a multiple time-point difference-in-differences model, we analyze how ESG ratings influence both the output and efficiency of green innovation. The findings reveal that ESG ratings significantly promote green innovation, particularly by encouraging companies to increase investments in environmental protection, social responsibility, and corporate governance. Additionally, ESG ratings facilitate green innovation by reducing financing pressures, increasing media attention, and mitigating managerial myopia, with the effects most pronounced in highly polluting industries and firms with weaker corporate governance structures. These results offer valuable insights for companies pursuing sustainable development and for policymakers aiming to foster green innovation.”

 

1. Introduction

The first paragraph of the introduction lacks proper citations, with only the first sentence being correctly referenced.

The same issue occurs in several parts of the paragraphs throughout the introduction. A suggestion would be for the authors to better structure the text, making the paragraphs more concise and focused.

The introduction section should tell a clear and engaging story, concluding with a well-defined statement of the study’s objectives and methods. It is recommended that this section be rewritten to improve clarity and coherence.

To strengthen the causal inference between ESG ratings and green innovation, this study uses a multiple time-point difference-in-differences (DID) model with a carefully selected control group. This methodological approach minimizes endogeneity concerns and helps isolate the effect of ESG ratings on green innovation outcomes. Additionally, we employ robustness checks, including placebo tests, lagged treatments, and control for zero-inflation in patent data, ensuring that observed impacts are not driven by random variation or measurement biases.

By incorporating the methodological rigor, the study ensures that the impact of ESG ratings on green innovation is credible and robust. This approach justifies the policy recommendations, as the findings offer empirical evidence that ESG ratings can meaningfully influence corporate environmental strategies. Policymakers can thus consider ESG ratings as a viable informal regulatory tool to incentivize sustainable practices without imposing direct regulatory burdens. For corporate managers, the results suggest that improving ESG ratings can enhance green innovation capacity, providing competitive advantages in terms of cost efficiency, market image, and regulatory compliance.

Thank you. We rewrite the introduction.

“The pursuit of economic green innovation has garnered global attention as societies aim to balance economic growth with environmental sustainability (Wang et al., 2023). Enterprises, as primary economic agents, are pivotal in advancing green and sustainable development. However, companies face significant challenges in green innovation, including high investment risks, uncertain returns, long innovation cycles, extensive capital requirements, and often limited intrinsic motivation. These challenges span financing, technological development, market conditions, and regulatory policies, all demanding continuous corporate commitment and exploration. Thus, a key question arises: how can businesses be effectively incentivized to embrace green innovation, thereby contributing to sustainable development? This question is particularly pressing for government regulators and industry leaders.

Two predominant strategies for encouraging green innovation in corporations have emerged: stringent formal environmental regulation and adaptable informal regulation. Formal environmental policies, increasingly adopted worldwide, use mandatory instruments to compel firms toward green practices, such as government subsidies for environmental protection (Feng & Xin, 2024) and enhanced regulatory frameworks like China’s Environmental Protection Law (Zhang et al., 2024). These policies are intended to steer companies toward innovation that benefits both the economy and the environment. However, excessive formal regulation may raise production costs, reducing firms’ free cash flow and, consequently, their international competitiveness (Murty & Kumar, 2003; Cole & Elliott, 2003). Informal regulation, in contrast, can complement formal measures by stimulating internal motivations and improving firms’ market positioning, thereby supporting their competitiveness and green innovation efforts (Flammer, 2019; Bucaro et al., 2020).

Given this backdrop, the current study examines the role of Environmental, Social, and Governance (ESG) ratings as an informal regulatory tool influencing corporate green innovation. ESG ratings serve as a bridge between firms and the market, offering a platform for companies to communicate their environmental commitment. By analyzing ESG rating data for listed firms from SynTao Green Finance, this study leverages China as an ideal research setting to explore the relationship between ESG ratings and corporate innovation. Prior studies suggest varied relationships between ESG and green innovation, with some showing a U-shaped relationship (Li et al., 2022) and others indicating an inverse link (Liu et al., 2024). However, evidence generally supports a positive contribution of ESG ratings to corporate innovation (Tan, 2022; Wang et al., 2023).

This paper contributes to the literature by examining the nuanced impacts of ESG ratings on green innovation within highly polluting industries, focusing on firms listed on China's A-shares between 2012 and 2022. We incorporate a difference-in-differences model to assess the effects on innovation outputs and efficiency, accounting for factors like financing constraints, managerial myopia, and media attention. The study findings underscore that ESG ratings significantly foster corporate green innovation, particularly among companies in highly polluting sectors and those with lower corporate governance quality. This paper provides a novel perspective by quantifying green innovation across invention and non-invention patents, thereby offering a comprehensive evaluation.

By revealing the interactions between ESG ratings, corporate governance, and green innovation, this research contributes a unified framework that enhances our understanding of market-oriented green innovation mechanisms. These insights offer policymakers and business leaders actionable recommendations to foster sustainable innovation and mitigate environmental impact within China's corporate sector.”

 

1. Research hypotheses

The hypotheses presented in this section do not align with the results outlined earlier in the abstract. Here, the authors only analyze whether ESG ratings improve outcomes related to corporate green innovation, as well as quality.

Additionally, the distinction between the terms "outcome" and "quality" is not clear. It would be helpful to clarify these terms and how they differ in the context of the study to avoid any confusion.

Thanks for your comment. We revise our hypotheses.

H1: ESG ratings significantly improve the output of corporate green innovation, measured by the quantity and effectiveness of green innovation activities undertaken by firms.

H2: ESG ratings significantly enhance the efficiency of corporate green innovation, defined as the extent to which green innovation investments translate into tangible environmental and social benefits, thereby reflecting the quality of green innovation.

 

2. Research design

This section could benefit from a clearer presentation of the methodology, possibly through a diagram or figure. It would be helpful to outline the steps taken in defining the research design and provide guidance on how other researchers might replicate this study, potentially focusing on different aspects.

As for the other elements of the paper, no further recommendations are deemed necessary.

The main concern, however, is conceptual: the inferences about the impact of ESG ratings on green innovation are quite broad. How do the authors ensure that the scope of the paper justifies these cause-and-effect inferences, especially considering the subsequent policy recommendations for governments and companies? Clarifying this would strengthen the overall argument.

Thank you very much.

We have added Figure 1 in the paper before resarch design part. Please see Page 4.

To strengthen the causal inference between ESG ratings and green innovation, this study uses a multiple time-point difference-in-differences (DID) model with a carefully selected control group. This methodological approach minimizes endogeneity concerns and helps isolate the effect of ESG ratings on green innovation outcomes. Additionally, we employ robustness checks, including placebo tests, lagged treatments, and control for zero-inflation in patent data, ensuring that observed impacts are not driven by random variation or measurement biases.

By incorporating the methodological rigor, the study ensures that the impact of ESG ratings on green innovation is credible and robust. This approach justifies the policy recommendations, as the findings offer empirical evidence that ESG ratings can meaningfully influence corporate environmental strategies. Policymakers can thus consider ESG ratings as a viable informal regulatory tool to incentivize sustainable practices without imposing direct regulatory burdens. For corporate managers, the results suggest that improving ESG ratings can enhance green innovation capacity, providing competitive advantages in terms of cost efficiency, market image, and regulatory compliance.

 

Reviewer 2

- Building on the last point in the literature the reverse effect is studied as well. While the authors consider the parallel trend tests as well as consider corporate governance as moderator, how is it assured that no issues with endogeneity persist and that in particular government policy (and changes thereof) do not act as an additional moderator?

To ensure the robustness of the relationship between ESG (environmental, social and corporate governance) and corporate green innovation, this paper employs a multi-dimensional and systematic validation strategy. These strategies include parallel trend tests, placebo tests, application of a zero-inflated model, alternation of variable measures, sample range adjustment, control for constituents of market-representative indices such as the CSI300 and CSI500, and lagged treatment of green innovation indicators. This series of rigorous robustness tests all consistently show that there is a significant positive correlation between ESG and corporate green innovation, providing strong evidence that ESG practices can significantly drive corporate green innovation behaviour.

Given that government policy is a macro variable that is difficult to measure directly given the long sample interval and the wide range of related policy influences, this paper does not directly include government policy as a control variable in the model. However, this paper is fully aware of the important impact of government policies on the market and firm behaviour, especially as they tend to have a preferential effect on market-representative groups of firms such as the CSI300 and CSI500. In order to effectively mitigate the potential bias of policy factors on the results, the paper specifically includes these index constituents as control variables in the analysis. Through this treatment, this paper is able to more accurately reflect the intrinsic link between ESG and corporate green innovation when exploring the relationship between the two, thus providing a more reliable basis for research and practice in related fields.

 

- In the later part of the empirical study the authors conduct a study on the mechanism. As I read the section, the objective at that point is to consider three aspects that impact green innovations and study inhowfar the ESG rating impacts each of them. If my assessment of the objective of this part is wrong it should be made more understandable in the text. If the assessment is correct, the first questions arise about endogeneity issues, since in an earlier part the author indirectly argue that these aspects at least in part impact the ESG rating as well. Secondly, it needs to be established that these three mechanisms actually work and the respective variables significantly impact green innovations and can explain a larger share thereof.

This paper ensures the robustness of the relationship between ESG and corporate green innovation by addressing possible endogeneity issues as much as possible through a variety of means and by fully considering government policy as an influencing factor, as suggested by the reviewers. Therefore, the conclusion that there is an endogeneity problem affecting the mechanism test between ESG and corporate green innovation cannot be made. In the mechanism testing part of this paper, we separately test the role of financing constraints, managers' myopic behaviour and media attention in promoting green innovation, and the results show that all three have a significant impact on green innovation. In addition, we explore the relationship between these three factors and their impact on green innovation from both theoretical and practical perspectives.

Specifically, financial constraints focus on the impact of internal capital status on green innovation, managerial myopia focuses on the decision-making tendency of the firm's management, and media attention reflects the monitoring and promoting role of the firm's external environment. The roles played by each of these three factors in the actual operation of the company will be different under different scenarios and conditions. Therefore, it is not possible to make a simple judgement as to which of the three is more important without considering specific scenarios.

The aim of this paper is to show that companies with higher ESG scores can promote their own green innovation in three ways: by easing financing constraints, by reducing managers' myopic behaviour and by increasing media attention. However, this paper cannot guide companies in choosing a particular approach, as different companies face different contexts and conditions in their operations. Instead, companies should consider all three factors in the context of their own actual situation in order to develop a green innovation strategy that best suits their needs.

 

- This brings me to the next issue concerning effect sizes and explanatory power of the conducted analyses. While the effects are significant, considering the number of observations comes as no surprise. Critical, however, are the low values of R^2. With values of slightly more than 1% for the patents (quality with around 30% is quite ok) the model explains almost nothing of the green patenting activities and the effect is weak at best. Even a later increase to around 3% does not do much in this regard. This issues definitely needs to be addressed, i.e., where is the value of a study that can explain only slightly more than 1% of the dependent variable?

The significance of the study is far-reaching and can be elaborated in two dimensions: statistical and literature review.

In terms of statistics, although the R² value of this paper is slightly higher than 1%, the result still reaches the three-star significant level, which verifies the robustness of the model and the reliability of the conclusions to some extent. Furthermore, a review of the relevant literature on corporate green innovation over the past two years shows that the low R² value is not an exception, but is common in research in this area. For example, in studies such as Jia et al. (2023), Liu et al. (2024), Han et al. (2024), Yang et al. (2024) and Chen et al. (2024), the same low R² value occurs when firms' green innovations are used as the dependent variable in regression analyses. This suggests that when assessing the value of this type of research, we should not make a judgement based on the high or low R² value alone, but should consider the significance, robustness and actual explanatory power of the model.

In terms of the literature discussion, this paper is devoted to detailing the impact of ESG (environmental, social and corporate governance) on the quality and quantity of corporate green innovation. By digging deeper and analysing the relevant theoretical and empirical results, we provide clear diagrams to further illustrate the pathways and ways in which ESG affects corporate green innovation. This not only enriches the research findings in this area, but also provides strong theoretical support and practical guidance for promoting corporate green development.

In summary, by combining statistical analysis and literature discussion, this paper attempts to comprehensively reveal the value and significance of ESG in promoting corporate green development, and provides useful references for further research and practical applications in this field.

1. Jia, J., He, X. Y., Zhu, T. Y., & Zhang, E. Y. (2023). Does green finance reform promote corporate green innovation? Evidence from China. Pacific-Basin Finance Journal, 82, 102165.
2. Liu, X. J., Huang, N. G., Su, W.H., & Zhou, H. Y. (2024). Green innovation and corporate ESG performance: Evidence from Chinese listed companies. International Review of Economics & Finance, 95, 103461.
3. Han, F., Mao, X., Yu, X. Y., & Yang, l. G. (2024). Government environmental protection subsidies and corporate green innovation: Evidence from Chinese microenterprises. Journal of Innovation & Knowledge, 9(1), 100458.
4. Yang, J. X., & Hui, N. (2024). How digital finance affects the sustainability of corporate green innovation. Finance Research Letters, 63, 105314.
5. Chen, Y., Zhang, Y. J., & Wang, M. S, (2024). Green credit, financial regulation and corporate green innovation: Evidence from China. Finance Research Letters, 59, 104768.】

 

- The part on corporate governance as a moderator should also introduce the moderating effect into the estimation, i.e. the interaction between independent and moderator variable.

There are a variety of analytical approaches to exploring moderation effects. One common method is to add an interaction term to the original model to make a judgement. However, this paper adopts a different method, which is to split the moderating variables directly and identify the differences between different groups using the CHOW test. These two methods are operationally different but should theoretically lead to similar conclusions.

In contrast to the approach of including interaction terms, this paper chooses to examine the grouping of the moderating variables. Specifically, I divide the moderator variable, corporate governance, into two well-defined subsets. The subset above the sample mean is set as the control group (labelled 1), while the subset below the sample mean is set as the experimental group (labelled 0). I then examined the relationship between ESG (environmental, social and corporate governance) and firms' green innovation in each of these two separate subsets.

Finally, using the CHOW test, I was able to clearly compare the significant differences that exist between these two groups in terms of the impact of ESG on firms' green innovation. This approach is not only direct and effective, but also intuitively reveals the role of the moderating variables. Therefore, this paper does not use the inclusion of interaction terms to further demonstrate this moderating effect. Such a treatment makes the whole research process more fluid and easier to understand.

 

- Title of Table 7 is part of the text

Table 7. Robustness Test - Controlling for Constituent Stock Effects 1.

 

 

Author Response File: Author Response.docx

Reviewer 2 Report (Previous Reviewer 1)

Comments and Suggestions for Authors

While the authors suitably addressed some of the issues I raised in the first round of the revision process, four major and one minor issue still persist. Please provide as well a detailled answer which issues are addressed in which way or why they are disregarded.

Major issues:

- Building on the last point in the literature the reverse effect is studied as well. While the authors consider the parallel trend tests as well as consider corporate governance as moderator, how is it assured that no issues with endogeneity persist and that in particular government policy (and changes thereof) do not act as an additional moderator?

- In the later part of the empirical study the authors conduct a study on the mechanism. As I read the section, the objective at that point is to consider three aspects that impact green innovations and study inhowfar the ESG rating impacts each of them. If my assessment of the objective of this part is wrong it should be made more understandable in the text. If the assessment is correct, the first questions arise about endogeneity issues, since in an earlier part the author indirectly argue that these aspects at least in part impact the ESG rating as well. Secondly, it needs to be established that these three mechanisms actually work and the respective variables significantly impact green innovations and can explain a larger share thereof.

- This brings me to the next issue concerning effect sizes and explanatory power of the conducted analyses. While the effects are significant, considering the number of observations comes as no surprise. Critical, however, are the low values of R^2. With values of slightly more than 1% for the patents (quality with around 30% is quite ok) the model explains almost nothing of the green patenting activities and the effect is weak at best. Even a later increase to around 3% does not do much in this regard. This issues definitely needs to be addressed, i.e., where is the value of a study that can explain only slightly more than 1% of the dependent variable?

- The part on corporate governance as a moderator should also introduce the moderating effect into the estimation, i.e. the interaction between independent and moderator variable.

Minor issue:

- Title of Table 7 is part of the text

Author Response

Reviewer 2

- Building on the last point in the literature the reverse effect is studied as well. While the authors consider the parallel trend tests as well as consider corporate governance as moderator, how is it assured that no issues with endogeneity persist and that in particular government policy (and changes thereof) do not act as an additional moderator?

To ensure the robustness of the relationship between ESG (environmental, social and corporate governance) and corporate green innovation, this paper employs a multi-dimensional and systematic validation strategy. These strategies include parallel trend tests, placebo tests, application of a zero-inflated model, alternation of variable measures, sample range adjustment, control for constituents of market-representative indices such as the CSI300 and CSI500, and lagged treatment of green innovation indicators. This series of rigorous robustness tests all consistently show that there is a significant positive correlation between ESG and corporate green innovation, providing strong evidence that ESG practices can significantly drive corporate green innovation behaviour.

Given that government policy is a macro variable that is difficult to measure directly given the long sample interval and the wide range of related policy influences, this paper does not directly include government policy as a control variable in the model. However, this paper is fully aware of the important impact of government policies on the market and firm behaviour, especially as they tend to have a preferential effect on market-representative groups of firms such as the CSI300 and CSI500. In order to effectively mitigate the potential bias of policy factors on the results, the paper specifically includes these index constituents as control variables in the analysis. Through this treatment, this paper is able to more accurately reflect the intrinsic link between ESG and corporate green innovation when exploring the relationship between the two, thus providing a more reliable basis for research and practice in related fields.

 

- In the later part of the empirical study the authors conduct a study on the mechanism. As I read the section, the objective at that point is to consider three aspects that impact green innovations and study inhowfar the ESG rating impacts each of them. If my assessment of the objective of this part is wrong it should be made more understandable in the text. If the assessment is correct, the first questions arise about endogeneity issues, since in an earlier part the author indirectly argue that these aspects at least in part impact the ESG rating as well. Secondly, it needs to be established that these three mechanisms actually work and the respective variables significantly impact green innovations and can explain a larger share thereof.

This paper ensures the robustness of the relationship between ESG and corporate green innovation by addressing possible endogeneity issues as much as possible through a variety of means and by fully considering government policy as an influencing factor, as suggested by the reviewers. Therefore, the conclusion that there is an endogeneity problem affecting the mechanism test between ESG and corporate green innovation cannot be made. In the mechanism testing part of this paper, we separately test the role of financing constraints, managers' myopic behaviour and media attention in promoting green innovation, and the results show that all three have a significant impact on green innovation. In addition, we explore the relationship between these three factors and their impact on green innovation from both theoretical and practical perspectives.

Specifically, financial constraints focus on the impact of internal capital status on green innovation, managerial myopia focuses on the decision-making tendency of the firm's management, and media attention reflects the monitoring and promoting role of the firm's external environment. The roles played by each of these three factors in the actual operation of the company will be different under different scenarios and conditions. Therefore, it is not possible to make a simple judgement as to which of the three is more important without considering specific scenarios.

The aim of this paper is to show that companies with higher ESG scores can promote their own green innovation in three ways: by easing financing constraints, by reducing managers' myopic behaviour and by increasing media attention. However, this paper cannot guide companies in choosing a particular approach, as different companies face different contexts and conditions in their operations. Instead, companies should consider all three factors in the context of their own actual situation in order to develop a green innovation strategy that best suits their needs.

 

- This brings me to the next issue concerning effect sizes and explanatory power of the conducted analyses. While the effects are significant, considering the number of observations comes as no surprise. Critical, however, are the low values of R^2. With values of slightly more than 1% for the patents (quality with around 30% is quite ok) the model explains almost nothing of the green patenting activities and the effect is weak at best. Even a later increase to around 3% does not do much in this regard. This issues definitely needs to be addressed, i.e., where is the value of a study that can explain only slightly more than 1% of the dependent variable?

The significance of the study is far-reaching and can be elaborated in two dimensions: statistical and literature review.

In terms of statistics, although the R² value of this paper is slightly higher than 1%, the result still reaches the three-star significant level, which verifies the robustness of the model and the reliability of the conclusions to some extent. Furthermore, a review of the relevant literature on corporate green innovation over the past two years shows that the low R² value is not an exception, but is common in research in this area. For example, in studies such as Jia et al. (2023), Liu et al. (2024), Han et al. (2024), Yang et al. (2024) and Chen et al. (2024), the same low R² value occurs when firms' green innovations are used as the dependent variable in regression analyses. This suggests that when assessing the value of this type of research, we should not make a judgement based on the high or low R² value alone, but should consider the significance, robustness and actual explanatory power of the model.

In terms of the literature discussion, this paper is devoted to detailing the impact of ESG (environmental, social and corporate governance) on the quality and quantity of corporate green innovation. By digging deeper and analysing the relevant theoretical and empirical results, we provide clear diagrams to further illustrate the pathways and ways in which ESG affects corporate green innovation. This not only enriches the research findings in this area, but also provides strong theoretical support and practical guidance for promoting corporate green development.

In summary, by combining statistical analysis and literature discussion, this paper attempts to comprehensively reveal the value and significance of ESG in promoting corporate green development, and provides useful references for further research and practical applications in this field.

1. Jia, J., He, X. Y., Zhu, T. Y., & Zhang, E. Y. (2023). Does green finance reform promote corporate green innovation? Evidence from China. Pacific-Basin Finance Journal, 82, 102165.
2. Liu, X. J., Huang, N. G., Su, W.H., & Zhou, H. Y. (2024). Green innovation and corporate ESG performance: Evidence from Chinese listed companies. International Review of Economics & Finance, 95, 103461.
3. Han, F., Mao, X., Yu, X. Y., & Yang, l. G. (2024). Government environmental protection subsidies and corporate green innovation: Evidence from Chinese microenterprises. Journal of Innovation & Knowledge, 9(1), 100458.
4. Yang, J. X., & Hui, N. (2024). How digital finance affects the sustainability of corporate green innovation. Finance Research Letters, 63, 105314.
5. Chen, Y., Zhang, Y. J., & Wang, M. S, (2024). Green credit, financial regulation and corporate green innovation: Evidence from China. Finance Research Letters, 59, 104768.】

 

- The part on corporate governance as a moderator should also introduce the moderating effect into the estimation, i.e. the interaction between independent and moderator variable.

There are a variety of analytical approaches to exploring moderation effects. One common method is to add an interaction term to the original model to make a judgement. However, this paper adopts a different method, which is to split the moderating variables directly and identify the differences between different groups using the CHOW test. These two methods are operationally different but should theoretically lead to similar conclusions.

In contrast to the approach of including interaction terms, this paper chooses to examine the grouping of the moderating variables. Specifically, I divide the moderator variable, corporate governance, into two well-defined subsets. The subset above the sample mean is set as the control group (labelled 1), while the subset below the sample mean is set as the experimental group (labelled 0). I then examined the relationship between ESG (environmental, social and corporate governance) and firms' green innovation in each of these two separate subsets.

Finally, using the CHOW test, I was able to clearly compare the significant differences that exist between these two groups in terms of the impact of ESG on firms' green innovation. This approach is not only direct and effective, but also intuitively reveals the role of the moderating variables. Therefore, this paper does not use the inclusion of interaction terms to further demonstrate this moderating effect. Such a treatment makes the whole research process more fluid and easier to understand.

 

- Title of Table 7 is part of the text

Table 7. Robustness Test - Controlling for Constituent Stock Effects 1.

 

 

Round 2

Reviewer 1 Report (New Reviewer)

Comments and Suggestions for Authors

Thank you for reviewing the presented topics. I hope they have contributed to the quality of the paper.
Figure 1 could be larger. There are also some errors in the figure that need to be reviewed.
There are formatting errors that need to be addressed throughout the sections.

Author Response

Thanks, we have revised the figure to make it larger. Please see the attachment.

Author Response File: Author Response.pdf

Reviewer 2 Report (Previous Reviewer 1)

Comments and Suggestions for Authors

All previously raised issues have been cleared by the authors.

Author Response

Thanks.

Author Response File: Author Response.pdf

This manuscript is a resubmission of an earlier submission. The following is a list of the peer review reports and author responses from that submission.

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

The authors consider an intersting topic that has distinct research merit. However, there are some critical points that need to be addressed before publication could be considered as well as some minor issues.

Major issues:

- While the authors cite some sources on the topic currently there are multiple studies available (focussing on China as well) that consider the same topic. This leads to two consequences for the authors. The literature part needs to focus more strongly on providing an overview on research already been done on the topic. Furthermore, it needs to be become clear in which way the study by the authors contribute to the existing literature.

- Building on the last point in the literature the reverse effect is studied as well. While the authors consider the parallel trend tests as well as consider corporate governance as moderator, how is it assured that no issues with endogeneity persist and that in particular government policy (and changes thereof) does not act as an additional moderator?

- In the later part of the empirical study the authors conduct a study on the mechanism. As I read the section, the objective at that point is to consider three aspects that impact green innovations and study inhowfar the ESG rating impacts each of them. If my assessment of the objective of this part is wrong it should be made more understandable in the text. If the assessment is correct, the first questions arise about endogeneity issues, since in an earlier part the author indirectly argue that these aspects at least in part impact the ESG rating as well. Secondly, it needs to be established that these three mechanisms actually work and the respective variables significantly impact green innovations and can explain a larger share thereof.

- This brings me to the next issue concerning effect sizes and explanatory power of the conducted analyses. While the effects are significant, considering the number of observations comes as no surprise. Critical, however, are the low values of R^2. With values of slightly more than 1% for the patents (quality with around 30% is quite ok) the model explains almost nothing of the green patenting activities and the effect is weak at best. Even a later increase to around 3% does not do much in this regard. This issues definitely needs to be addressed, i.e., where is the value of a study that can explain only slightly more than 1% of the dependent variable?

- Staying with the empirical analysis, the authors considers lags of up to three periods. Assuming that periods equal years (a point not addressed in the article) than only the three year lag might be considered for reasonable results. If there is a causal effect of ESG ratings on finance options (as stated in the article) this might have a first lag of about one year. Assuming that money is immediately used in research to generate new innovations, the effect would still take another year to generate new innovations. Patenting these innovations additionally might take between one and two years. Thus, only a lag structure of three to four years might be reasonable at all.

- Also with regard to the empirical study, the authors report a median of zero for patent numbers. This comes to no surprise, since a number of companies do not innovate or do not have green patents at all. But those excess zeros need to be accounted for in the analysis. One idea would be a zero-inflation model, that indirectly differentiates between companies innovating at all and then in a second step, if the innovate, what is the output of the innovation process, i.e. number of patents.

- The part on corporate governance as a moderator should also introduce the moderating effect into the estimation, i.e. the interaction between independent and moderator variable.

- While the author discuss the findings of their study, the research hypotheses, after introduction, are never addressed again and no test results are stated in relation to them.

Minor issues:

- In tables 11 and 12 the numbers for R^2 are displayed wrongly.

- The text has minor spelling and grammar mistakes, i.e. not exclusively the following:

the number of non-green invention innovations, and green innovation efficiency is robus.

Table 5. Robustness Test - Changing Variable Measurement1 (the "1" and in Table 6 the "2" should have a space in front)

- The following sentence seems to be missing something, i.e. it is hard to understand as is:

this paper adds two new variables to Model 1: and . equals 1 if company iii is included in the CSI 300 stocks in year ttt, and 0 otherwise. equals 1 if company iii is included in the CSI 500 stocks in year ttt, and 0 otherwise.

- Expressions with "we" as in the following sentence should be avoided.

In China, we mainly rely on mandatory formal environmental regulatory tools,

Comments on the Quality of English Language

Issues are detailled in the previous comments.

Author Response

Please see the attachment.

Author Response File: Author Response.pdf

Reviewer 2 Report

Comments and Suggestions for Authors

This paper examines the impact of ESG ratings on green innovation and its mechanism. Similar studies have been done on this topic, and it has limited contribution to the existing literature. My comments are as follows:

1.More references should be cited in the abstract.

2.The research hypothesis section needs a lot of recent literature.

3.Do the author delete delisted companies?

4.The authors did not discuss the results in detail.

5.There are some minor mistakes about language.

Comments on the Quality of English Language

English is fine.

Author Response

Please see the attachment

Author Response File: Author Response.pdf

Round 2

Reviewer 1 Report

Comments and Suggestions for Authors

The authors have addressed all of the previously raised issues sufficiently.