ESG: Resource or Burden? Evidence from Chinese Listed Firms with Innovation Capability as the Mediating Mechanism

Abstract

This study is based on data from 15,436 firm-year observations of Chinese A-share listed companies during the period 2009–2022 and examines the impact of ESG on firm value and the mediating role of corporate innovation capability. Firm value is proxied by Tobin’s Q, ESG is measured using Huazheng ESG scores, and innovation capability is represented by a weighted patent index. Using fixed-effects models and robustness text, we find that ESG has a significant positive impact on firm value, and this effect is transmitted through firms’ innovation capability. Further analysis reveals that the positive impact of ESG on firm value is more pronounced in non-SOE, firms in the maturity stage, and firms operating in highly competitive markets. Robustness tests confirm that the results are consistent and reliable. The findings suggest that ESG should be regarded as a strategic resource rather than a burden, as it creates firm value by enhancing innovation capability. The conclusions of this study not only extend the literature on the ESG–firm value nexus in the context of emerging markets but also provide practical implications for managers and policymakers seeking to integrate ESG into corporate strategy.

1. Introduction

With the growing emphasis on high-quality economic growth, the focus has shifted towards achieving greater quality, higher efficiency, greater fairness, and sustainability as key corporate objectives [1]. Consequently, the concept of sustainability-driven innovation has become a focal point for academics and professionals in various industries. ESG has gained prominence as an emerging trend for assessing a company’s sustainable practices and long-term viability [2]. This framework provides a holistic approach, enabling firms and investors to align economic outcomes with broader sustainability values encompassing environmental, social, and governance. Considering the growing focus on corporate social responsibility concerns, such as environmental degradation and financial accountability. The traditional idea of “responsible investment” has gradually evolved into the current concept of ESG investment [1]. Unlike the broader paradigm of sustainability and the more voluntary nature of CSR, ESG represents an institutionalized trend and market requirement that translates corporate performance in environmental, social, and governance dimensions into quantifiable indicators. Corporate investors are actively seeking investment opportunities that comply with ESG principles [3]. Social regulators have also intensified their focus on integrating ESG factors systematically and transparently into credit evaluations, further elevating the recognition and importance of ESG principles among listed companies. This trend highlights the increasing integration of ESG into the strategic practices of Chinese enterprises, reflecting not only an emphasis on sustainable development but also a comprehensive commitment to environmental, social, and governance responsibilities.

In the context of an emerging market, ESG in China is deeply intertwined with government policies [4], societal expectations [2], and traditional culture [5], prioritizing harmonious coexistence between businesses and society and long-term growth. China’s unique framework, cultural values, and business landscape differ significantly from those in developed economies, making national factors critical in interpreting ESG performance [6,7]. In this context, the Huazheng ESG rating system is one of the most widely used indicators in China, noted for its broad coverage, early establishment, and frequent updates, and is therefore widely adopted in both academic research and investment practice [8]. Furthermore, Chinese firms face dual pressures from economic restructuring and sustainable development goals [9]. Consequently, investigating the link between ESG and corporate value in the context of China’s emerging market is essential, as this setting provides a unique and rapidly evolving environment for testing the ESG–value relationship.

As ESG becomes increasingly integrated into corporate development, the research stream examining its impact on firm value has grown rapidly. The prevailing view in the literature demonstrates that ESG is closely linked to financial performance [10,11]. Numerous studies grounded in trade-off theory suggest that engaging in ESG activities entails substantial costs and inefficient resource utilization, potentially diminishing a firm’s profitability [12]. Consequently, ESG scores and firm performance show no or a negative correlation [13]. In contrast, from the standpoint of the Resource-Based View (RBV), ESG provide unique resources that exerts considerable influence on innovation capability and ultimately its overall value. RBV posits that a firm’s competitive advantage stems from resources and capabilities that are valuable, rare, inimitable, and non-substitutable [14]. These resources include both tangible and intangible assets, and poor ESG performance can deplete such critical resources and trigger controversies [15,16]. Enhancing ESG performance can reduce information asymmetry, improve corporate reputations, and stabilize supply chains, this communicates to customers a firm’s dedication to sustainable development and enhances corporate value [17]. In the existing literature, scholars typically adopt two types of measures to evaluate firm value. The first is accounting-based value [18], which reflects a firm’s internal operating performance; the second is market-based value [19], which captures capital market expectations of a firm’s future development [20]. As Wang et al. [21] note, firm value is a broad concept from the perspective of firms and their managers, encompassing both market value at a given point in time and financial performance generated over time. Following Wu et al. [15], we focus primarily on market-based firm value, proxied by Tobin’s Q, as the main dependent variable, while also employing the accounting-based performance measure (ROA) for robustness checks. Consistent with Tang et al. [22] and Nirino et al. [23] we comprehensively examine the extent to which ESG creates firm value or becomes a burden.

Firms actively support the transition toward a sustainable, low-carbon society while driving innovative practices that underpin economic expansion [24]. The essence of innovation is the creation of knowledge. Innovation capability refers to a firm’s ability to absorb and integrate knowledge and transform it into innovative outputs [25,26]. The use of patent application data to capture innovation capability has become common practice and is widely accepted in empirical research [27,28,29,30]. The dynamic capabilities theory (DCT) emphasizes the necessity for firms to remain agile, continuously modifying their resource base to align with the challenges and opportunities presented by changing market conditions [31]. The success of innovation strategies is contingent on dynamic capabilities. It emphasizes the need for firms to dynamically reconfigure resources and capabilities in order to respond to shifting markets and emerging technologies [32]. From this perspective, innovation capability can be regarded as an important manifestation of dynamic capabilities, as it similarly emphasizes the creation of new value through resource integration and knowledge recombination. As Weber and Heidenreich [25] point out, innovation capability as a dynamic capability is highly consistent with the conceptual foundations of dynamic capabilities. Corporate innovation is essential for maintaining a firm’s competitive advantage while also improving its overall value. In sustainable development, firms focus more on meeting stakeholder expectations when engaging in technological innovation or developing new business models. Firms are committed to creating integrated economic, social, and environmental value through innovation. These innovation efforts aim to improve market performance and enhance competitiveness and are vital to promoting sustainable corporate development. Limited research has thoroughly explored how corporate innovation moderates this relationship, leaving a significant gap in understanding its mediating role. This highlights the necessity further to investigate this mediating role from theoretical and practical perspectives. Accordingly, this study examines whether innovation capability mediates the relationship, thereby transforming ESG from a cost burden into a strategic resource that enhances firm value.

In summary, ESG has become an important framework for firms to achieve sustainable development strategies, yet its impact on firm value remains contested. Existing studies have primarily focused on the direct financial effects of ESG, while relatively few have systematically examined the mechanisms through which ESG creates or erodes value, particularly in the context of emerging markets such as China. Drawing on the RBV and DCT, this study aims to explore how ESG performance generates firm value in emerging markets, and posits that innovation capability serves as a key channel linking ESG practices to firm value. The study clarifies whether ESG should be regarded as a burden or a strategic resource and identifies the conditions under which its effects are more pronounced. Thereby contributing to theoretical discussions and providing practical guidance for corporate strategy and policymaking.

2. Literature Review and Hypothesis Development

2.1. ESG and Firm Value

Prior research highlights the significance of ESG as a critical factor influencing the long-term viability and prosperity of businesses [33]. The RBV posits that ESG management fosters the development and utilization of a firm’s internal resources, and the capability to harness these resources effectively is a cornerstone for boosting organizational value [34]. Friede et al. [35] used vote counting and meta-analysis to find that most studies supported this hypothesis. Furthermore, they demonstrated that firms can gain higher trust and value assessment in the capital market through sustained ESG efforts [35]. By implementing effective ESG practices, firms can potentially significantly enhance their market value and financial performance. Further research suggests that improved ESG performance could lead to reduced cost of capital while simultaneously enhancing the operational efficiency of its assets. As Dhaliwal et al. [36] demonstrated, firms with superior ESG reporting typically attract more long-term investors. These investors perceive firms with high ESG standards to be less risky; therefore, they are willing to invest at a lower rate of return [36]. For investors, holding stock in firms with high ESG scores can provide a high level of liquidity during stages of market turbulence [37]. Furthermore, socially responsible corporate behavior is pivotal for attracting talent, maintaining employee satisfaction, and enhancing overall productivity and corporate value [38]. Adopting socially responsible strategies within an organization can bolster its public image and strengthen consumer loyalty, thus conferring a competitive advantage. Based on insights gained from the prior literature, we propose the following hypothesis:

H1. 

ESG exerts a significantly positive effect on corporate firm value.

2.2. ESG Performance, Innovation Capability, and Firm Value

The DCT, which is inextricably linked to innovation, posits that organizations must adapt and update their capabilities to remain competitive under rapidly changing market conditions [31]. Businesses must adopt innovative practices to ensure their continued survival [39]. The success of an innovation strategy is contingent upon its capacity to discern and capitalize on opportunities for organizational growth [40,41]. Thus, innovation is regarded as a critical driver enabling firms in continuously adapting and evolving their capabilities to maintain a sustainable competitive edge.

Lawson and Samson [42] argue that innovation capability enables firms to design and implement effective innovation processes, thereby facilitating the development of new products, services, and processes, and ultimately leading to sustainable competitive advantage and superior performance. The essence of innovation is the creation of knowledge. Thus, innovation capability can be defined as a firm’s ability to acquire and absorb new knowledge and transfer it into new products or services [25]. Similarly, Tang et al. [26] conceptualize innovation capability as a firm’s ability to attract and integrate resources, enhance innovation performance, and transform these into innovation outputs. Although prior studies vary in how they conceptualize innovation capability, scholars consistently regard it as a higher-order integrative capability [42,43]. Therefore, Weber and Heidenreich [25] suggest that innovation capability, as a dynamic capability, is closely aligned with the theoretical foundations of dynamic capabilities. Building on these perspectives, this study defines corporate innovation capability as the ability of firms to effectively mobilize internal and external innovation resources, conduct innovation activities, and generate innovation outcomes.

Yang et al. [9] emphasized the significant influence of elevated ESG scores in fostering innovation, particularly in areas of sustainability and technology. This suggests that firms are recognized for their strong ESG performance. ESG can substantially affect corporate green innovation [44], thereby driving companies to demonstrate superior innovation performance in the future [45]. Initially, firms with low ESG ratings emphasize corporate governance adjustments more than innovation. However, as ESG ratings increase, firms become more engaged in green innovation and recognize it as a critical factor for growth, especially in industries facing high operational risk or low profitability [9]. The positive impact of strong ESG performance on innovation is particularly evident in high-pollution and traditional industries [24]. Companies within these sectors often channel substantial investments into R&D and successfully recruit elite research professionals, thereby enhancing the quality and output of their innovations and improving firm value.

As Wang et al. [21] note, firm value is a broad concept from the perspective of firms and their managers, encompassing both market value at a given point in time and financial performance generated over time. Regarding firm value, innovation is a key driver in enhancing business mechanisms [46]. The Porter hypothesis emphasizes that the implementation of rigorous environmental standards can prompt firm compliance while simultaneously promoting related technological innovations and efficiency improvements, which ultimately translates into a competitive advantage [47]. Innovation improves subsequent firm performance [48]. According to Huang et al. [46] digital innovation contributes positively to firm value by improving workforce efficiency, lowering operational expenses, and bolstering competitive positioning. Innovation synergistically impacts firm performance, with varying effects observed at different innovation levels and across industry categories [39]. High ESG performance indirectly increases firm value by enhancing innovation. Enterprises’ innovation achievements can create new business opportunities and improve market competitiveness, which ultimately translates into enterprise value growth. Accordingly, we propose that innovation capacity is a crucial mediating factor linking ESG performance to firm value. Thus, the following hypothesis is developed:

H2. 

ESG enhances firm value through the mediating effect of innovation capability.

3. Materials and Methods

3.1. Data Sources and Samples

This study employs the primary focus is on how corporate ESG affects corporate overall value while examining the mediating effect of innovation capability. The firm-level data are sourced from the CSMAR database (https://data.csmar.com/). It is the most authoritative and widely used source of data on Chinese listed companies [49]. Huazheng ESG ratings were introduced in 2009 [22], which incorporates additional indicators that align more closely with the Chinese developmental trajectory than those used in other ESG rating systems [50]. Therefore, the dataset analyzed focuses on Chinese A-share listed companies from 2009 to 2022. To enhance the accuracy and reliability of the data, a rigorous sample selection process was implemented. First, financial firms were excluded from the analysis. Due to the particularities of their capital structure and regulatory environment [17,24]. Second, firms labeled as ST, ST*, or those with incomplete data were excluded. “ST” refers to firms incurring losses for two consecutive years and receiving “special treatment” under stock exchange rules; “ST*” denotes firms with three consecutive years of losses facing delisting risks. These firms’ financial data are not representative and could introduce bias into the result [51,52]. Third, to mitigate the influence of outliers [53], continuous variables were winsorized at the 1st and 99th percentiles. The final dataset consists of 15,436 observations.

3.2. Variable Definitions

3.2.1. Firm Value

We employ Tobin’s Q as the explained variable for assessing corporate performance [54,55,56], applying a logarithmic transformation in the empirical analysis. As a key financial indicator, Tobin’s Q is instrumental for this purpose [57]. It enables firms and economists to assess a firm’s potential for corporate value creation and market performance, thereby ensuring comprehensive and in-depth results [3].

3.2.2. ESG Performance

Huazheng ESG data provides a comprehensive multidimensional insights of Chinese firms’ ESG performance. Tang and Yang [4] highlighted the value of Huazheng ESG data in assessing the ESG performance of domestic firms, offering insights into the China-specific market context. Further validation by Bin-Feng et al. [58] demonstrated that Huazheng ESG data are highly relevant and reliable across a multitude of academic and applied studies, thereby ensuring the generalizability and applicability of the findings. Considering the potential for a skewed distribution of the ESG score data, we implement a logarithmic treatment [59]. This diminishes the impact of extreme values, thus enhancing the regression analysis’s statistical reliability and explanatory capacity. The log-transformed data exhibit a closer approximation to a normal distribution, thereby rendering the statistical tests more robust.

3.2.3. Innovation Capability

This study uses firms’ innovation capability as the mediating variable. A firm’s capacity for innovation is pivotal for determining its long-term competitiveness and market performance. The number of patent applications represents the external manifestation of a firm’s ability to integrate resources and apply knowledge and processes. Using patent application data to capture innovation capability has become common practice and is widely accepted in empirical research [27,28,29,30]. Patent applications more accurately reflect a firm’s knowledge creation and technological transformation process during a specific period [60] and can thus be understood as the result of innovation capability. In China, the National Intellectual Property Administration grants three types of patents: invention patents, utility model patents, and design patents. By aggregating these patent types and constructing a weighted patent index, we quantify and analyze firms’ innovation capability.

Specifically, invention patents represent a firm’s fundamental expertise in technological innovation, meeting the requirements of novelty, creativity, and utility [48], and therefore should be assigned greater value [61]. While utility model patents typically encompass incremental improvements, they represent an enterprise’s commitment to enhancing and optimizing its product functionality. Design patents represent the most basic form of innovation, play a significant role in consumer purchasing decisions despite their comparatively low technological content [62,63]. In summary, consistent with Yang et al. [30] this study considers all three types of patents as jointly constituting the complete system of a firm’s innovation capability and assigns differentiated weights to them. Following the recommendation of Wang and Yan [64], invention patents are weighted at 30%, utility model patents at 20%, and design patents at 10%, and the logarithmic form of this index is employed in the analysis. These weightings not only reflect the degree of contribution of different types of patents to firms’ innovation capacity but also consider their actual impact on the market and the technological field.

3.2.4. Control Variables

The selection of control variables in this study is informed by insights derived from previous literature [2,51]. The control variables considered in the analysis encompass firm size (Size), growth rate (Growth), number of board members (Board), listing duration (Listage), proportion of tangible assets (Tang), ownership concentration reflected by the largest shareholder’s shareholding percentage (Top1), financial leverage (Lev), CEO-chairperson role duality (Dual), and institutional investor ownership (INST). Furthermore, dummy variables are introduced for state-owned enterprises (SOE), life cycles, and degree of competition. Integrating these variables allows for a more detailed exploration of the complex interplay between ESG and firm value, providing a broader and deeper understanding of their relationship. The definitions of the variables are comprehensively outlined in

Table 1. Variable definitions.

Variable	Abbreviation	Description
Firm value	TobinQ	Ln (capital structure ratio)
ESG performance	ESG	Ln (ESG score)
Innovation capability	Innovate	Number of patent applications
Firm size	Size	Ln (total assets for the year)
Firm growth	Growth	Growth rate
Board members	Board	Ln (total number of board of directors)
Number of years listed	Listage	Ln (current year-listed year + 1)
Ratio of tangible assets	Tang	(Net assets + net inventories)/total assets
Largest shareholder’s ownership	Τop1	Ln (largest shareholder’s shares/total shares)
Leverage	Lev	Total liabilities divided by total assets
Duality	Dual	The board chair and general manager are the same person = 1; otherwise = 0
Institutional ownership	Inst	Ln (institutional ownership ratio)
Nature of equity	SOE	State-owned enterprises (SOE = 1); non-state-owned enterprises (SOE = 0)
Life cycle	Life cycle	Growth = 1; maturity = 2; decline = 3
Market competition	Competition level	High-competition = 1; low-competition = 0

.

3.3. Model Specification

We construct fixed effect models (1), (2), and (3) to test the hypotheses:

$${TobinQ}_{i,t}={\beta }_0+{\beta }_1{ESG}_{i,t}+\sum {\beta }_j{Control}_{i,t}+{Industry}_i+{Year}_t+{\epsilon }_{i,t}$$

(1)

$${Innovate}_{i,t}={\beta }_0+{\beta }_1{ESG}_{i,t}+\sum {\beta }_j{Control}_{i,t}+{Industry}_i+{Year}_t+{\epsilon }_{i,t}$$

(2)

$${TobinQ}_{i,t}={\beta }_0+{\beta }_1{ESG}_{i,t}+{\beta }_2{Innovate}_{i,t}+\sum {\beta }_j{Control}_{i,t}+{Industry}_i+{Year}_t+{\epsilon }_{i,t}$$

(3)

where i denotes the firm and t denotes the year. TobinQ_i,t measures firm value, ESG_i,t represents ESG performance, and Innovate_i,t measures innovation capability. Control_i,t in regression model (1) to regression model (3) are control variables.

4. Results

4.1. Descriptive Statistics

Table 2. Descriptive statistics.

Variables	N	Min	Max	Mean	p50	SD
TobinQ	15,436	−0.220	2.750	0.600	0.520	0.460
ESG	15,436	3.960	4.450	4.300	4.310	0.060
Innovate	15,436	−2.300	7.530	0.860	0.740	1.430
Size	15,436	19.65	26.45	22.19	21.97	1.260
Growth	15,436	−0.660	3.560	0.180	0.130	0.310
Board	15,436	1.610	2.710	2.120	2.200	0.200
Listage	15,436	0	3.400	1.890	1.950	0.790
Tang	15,436	0.010	0.850	0.340	0.330	0.160
Top1	15,436	8.020	75.84	34.18	32.05	14.69
Lev	15,436	0.030	0.900	0.390	0.380	0.190
Dual	15,436	0	1	0.310	0	0.460
Inst	15,436	0	121.8	42.87	43.97	26.76

presents the descriptive statistics for all variables. Tobin’s Q has a median of 0.52 and a mean of 0.6. Most values tend towards the lower end of the range, and the median is slightly below the mean. This indicates a slight leftward skewness in the data distribution. The median ESG score of 4.31 exhibits a minimal deviation from the mean value of 4.3, indicating that ESG is relatively concentrated within the dataset and volatility is low. This suggests that ESG scores are higher and less varied. The median innovation capability is slightly lower than the mean, and the standard deviation is 1.43. Some differences in innovation capability across companies.

4.2. Analysis of Correlations and Variance Inflation Factors

Correlation analysis findings are summarized in

Table 3. Correlation analysis results.

	TobinQ	ESG	Innovate	Size	Growth	Board	Listage	Tang	Top1	Lev	Dual	Inst
TobinQ	1
ESG	0.031 ***	1
Innovate	−0.060 ***	0.148 ***	1
Size	−0.361 ***	0.161 ***	0.331 ***	1
Growth	0.147 ***	−0.012	−0.002	0.009	1
Board	−0.112 ***	0.030 ***	0.067 ***	0.263 ***	−0.026 ***	1
Listage	−0.109 ***	0.010	0.094 ***	0.495 ***	−0.125 ***	0.169 ***	1
Tang	−0.174 ***	−0.059 ***	−0.026 ***	0.168 ***	−0.047 ***	0.157 ***	0.209 ***	1
Top1	−0.105 ***	0.050 ***	0.064 ***	0.177 ***	−0.023 ***	0.019 **	−0.086 ***	0.120 ***	1
Lev	−0.366 ***	−0.058 ***	0.169 ***	0.547 ***	0.034 ***	0.145 ***	0.332 ***	0.282 ***	0.061 ***	1
Dual	0.110 ***	−0.005	−0.020 **	−0.194 ***	0.039 ***	−0.194 ***	−0.230 ***	−0.100 ***	−0.025 ***	−0.144 ***	1
Inst	−0.007	0.106 ***	0.134 ***	0.434 ***	0.024 ***	0.259 ***	0.150 ***	0.176 ***	0.475 ***	0.209 ***	−0.171 ***	1

Note: *** p < 0.01, ** p < 0.05.

. We also calculated the VIF for all tested variables to examine multicollinearity among variables. The maximum VIF of 2.3 and average VIF of 1.37 indicate that multicollinearity issues are not present.

4.3. Regression Analysis

The Hausman test results show that prob > χ² = 0.00, which falls below the 0.05 threshold. This outcome confirms that the fixed effect model is the most suitable choice for our analysis [3]. The regression analysis outcomes, displayed in

Table 4. ESG performance, innovation capability, and firm value.

	(1)	(2)	(3)
VARIABLES	TobinQ	Innovate	TobinQ
ESG	0.352 ***	0.407 **	0.348 ***
	(6.71)	(2.37)	(6.66)
Innovate			0.009 ***
			(2.62)
Size	−0.186 ***	0.294 ***	−0.188 ***
	(−12.02)	(5.92)	(−12.13)
Growth	0.100 ***	−0.046	0.101 ***
	(9.95)	(−1.59)	(9.98)
Board	0.025	0.107	0.024
	(0.80)	(0.93)	(0.77)
Listage	0.300 ***	0.025	0.300 ***
	(17.61)	(0.45)	(17.59)
Tang	0.070	−0.227	0.072
	(1.57)	(−1.53)	(1.62)
Top1	−0.005 ***	0.004	−0.005 ***
	(−6.20)	(1.35)	(−6.25)
Lev	−0.080 *	−0.107	−0.079 *
	(−1.68)	(−0.81)	(−1.66)
Dual	−0.011	0.044	−0.011
	(−1.01)	(1.18)	(−1.05)
Inst	0.008 ***	0.000	0.008 ***
	(17.69)	(0.26)	(17.73)
Constant	2.884 ***	−8.680 ***	2.962 ***
	(6.14)	(−6.23)	(6.30)
Observations	15,436	15,436	15,436
R2	0.405	0.068	0.406
Number of id	2928	2928	2928
Year & Industry FE	YES	YES	YES
Sodel (Z)	7.600 ***
Bootstrap (1000)	4.32 ***
Adjusted R2	0.402	0.063	0.403

Note: Robust t-statistics are reported in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.

, Column (1), indicate a positive association between ESG and TobinQ (β = 0.352, p < 0.01). The results support H1.

4.4. Mediating Effect

The mediating role of innovation capability was tested following the three-step approach proposed by Wen et al. [65]. As shown in Table 4, Column (1), the total effect of ESG on Tobin’s Q is significantly positive (β = 0.352, p < 0.01). In Column (2), ESG also shows a positive association with innovation capability (β = 0.407, p < 0.05). When both ESG and innovation capability are included in the model (Column 3), ESG remains significant (β = 0.348, p < 0.01), while innovation capability itself also has a positive effect on firm value (β = 0.009, p < 0.01). These findings confirm that innovation capability partially mediates the relationship between ESG performance and firm value, thus supporting H2. To ensure the reliability of the mediating effect, we conducted robustness checks using the Sobel test and the Bootstrap method. Sobel test yielded a Z-value of 7.6. Similarly, the bootstrap analysis yielded a confidence interval for the indirect effect of [0.024, 0.065], which excludes 0, along with a Z-value of 4.32. Both the Sobel and Bootstrap methods support the robustness of the mediating effect of innovation capability. The results strengthen the argument that innovation capability is a crucial intermediary in the proposed framework by validating the mediation pathway through distinct statistical techniques.

4.5. Endogeneity Issues

In order to address potential issues of endogeneity between ESG performance and firm value, which may arise from omitted variable bias or reverse causality. We utilized two instruments: the overall mean ESG score of firms (ESG_allaverage) [8] and the industry-year average ESG score of firms (ESG_indyaverage) [59]. In

Table 5. Endogeneity issues.

	(1)	(2)
Variables	ESG	TobinQ
ESG_allaverage	0.956 ***
	(115.59)
ESG_indyaverage	0.729 ***
	(32.43)
ESG		0.723 ***
		(10.76)
Size	0.003 ***	−0.138 ***
	(6.22)	(−37.52)
Growth	−0.002	0.215 ***
	(−1.57)	(22.95)
Board	0.001	−0.060 ***
	(0.46)	(−3.79)
Listage	−0.000	0.071 ***
	(−0.02)	(15.88)
Tang	−0.007 **	−0.137 ***
	(−2.57)	(−5.99)
Top1	0.000	−0.003 ***
	(0.69)	(−10.93)
Lev	−0.013 ***	−0.410 ***
	(−5.25)	(−19.89)
Dual	0.000	0.044 ***
	(0.11)	(6.89)
Inst	−0.000	0.004 ***
	(−0.04)	(29.79)
Constant	−2.970 ***	0.929 ***
	(−30.16)	(3.33)
Observations	15,436	15,436
R2	0.557	0.432
Year FE	YES	YES
Industry FE	YES	YES
Adjusted R2	0.554	0.428

Note: t-statistics are reported in parentheses. *** p < 0.01, ** p < 0.05.

, the first-stage regression confirms that the selected instruments were strongly correlated with ESG performance. In the second stage, the instruments positively influence firm value (β = 0.723, p < 0.01). Additionally, the Cragg–Donald Wald F-statistic is 7633.85, indicating that the instruments employed are not weak.

4.6. Robustness Tests

To enhance the reliability and generalizability of our results, we conducted multiple validation procedures to support the primary conclusions. First, we used Bloomberg ESG scores as a proxy explanatory variable and performed a logarithmic conversion (BloombergESG). This scoring system is widely recognized as a reliable indicator of corporate performance in terms of ESG criteria [66]. It offers a distinct perspective compared to traditional ESG scores, helping validate the consistency of the study’s results. Using this approach, we ensured that the credibility of the study’s conclusions was not confined to a single scoring system.

Following Buallay et al. [19] and Zhang and Lucey [18], we used return on assets (ROA) as an explanatory variable to conduct additional robustness tests. ROA serves as a fundamental indicator of a firm’s financial health. By examining ROA, we can evaluate whether the observed association between these variables remains consistent under varying conditions, thus reinforcing the reliability of the findings.

Table 6. Robustness test results.

	(1)	(2)
Variables	ROA	TobinQ
ESG	0.018 *
	(1.90)
BloombergESG		0.040 ***
		(7.50)
Size	0.013 ***	−0.196 ***
	(6.09)	(−12.85)
Growth	0.051 ***	0.099 ***
	(24.54)	(9.89)
Board	0.006	0.028
	(1.18)	(0.86)
Listage	−0.013 ***	0.309 ***
	(−6.32)	(18.23)
Tang	−0.029 ***	0.058
	(−4.20)	(1.30)
Top1	0.000 **	−0.005 ***
	(1.97)	(−6.05)
Lev	−0.148 ***	−0.088 *
	(−18.29)	(−1.86)
Dual	0.001	−0.011
	(0.77)	(−1.00)
Inst	0.000 ***	0.008 ***
	(5.43)	(17.69)
Constant	−0.234 ***	4.648 ***
	(−3.72)	(11.90)
Observations	15,436	15,436
R2	0.253	0.409
Number of id	2928	2928
Year FE	YES	YES
Industry FE	YES	YES
Adjusted R2	0.249	0.406

Note: Robust t-statistics are reported in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.

displays the results of both assessments. Thus, the findings are robust and not significantly affected by the sample year or industry characteristics.

4.7. Further Examination

Beyond testing the core hypotheses, this study further explores whether the relationship between ESG and firm value different with firm characteristics and external environments. These analyses are exploratory in nature and serve as supplementary evidence to the main empirical results. Prior research suggests that the effects of ESG may differ depending on ownership structure, corporate lifecycle, and competition intensity. These factors can influence firms’ motivations and capabilities to translate ESG activities into firm value. Accordingly, this study conducts heterogeneity analyses along these three dimensions.

4.7.1. Ownership Types

Ownership plays a pivotal role in shaping both ESG practices and corporate performance [22,46]. Thus, to differentiate ownership types, we classified the firms in the sample as state-owned enterprises (SOEs) or non-state-owned enterprises (non-SOEs), relying on their equity structure as the primary criterion. We used subgroup regressions to examine whether equity heterogeneity affects ESG performance and firm value. A value of 1 is allocated to SOEs, while non-SOEs is designated with 0. The results shown in

Table 7. Further analysis results.

	Ownership Types		Life Cycle Stages			Market Competition
	(1)	(2)	(3)	(4)	(5)	(6)	(7)
	SOEs	Non-SOEs	Growth	Maturity	Decline	Low-Competition	High-Competition
ESG	0.266 ***	0.377 ***	0.353 ***	0.418 ***	0.301 **	0.224 ***	0.397 ***
	(2.92)	(5.87)	(4.35)	(5.08)	(2.17)	(4.02)	(4.68)
Size	−0.192 ***	−0.180 ***	−0.158 ***	−0.175 ***	−0.299 ***	−0.245 ***	−0.135 ***
	(−6.23)	(−9.75)	(−7.63)	(−10.75)	(−8.30)	(−13.84)	(−4.88)
Growth	0.072 ***	0.096 ***	0.087 ***	0.155 ***	0.094 ***	0.051 ***	0.121 ***
	(3.92)	(8.19)	(5.91)	(8.98)	(3.84)	(4.86)	(7.22)
Board	0.079	0.023	0.032	0.065	0.058	0.018	0.044
	(1.34)	(0.59)	(0.69)	(1.56)	(0.81)	(0.52)	(0.75)
Listage	0.226 ***	0.325 ***	0.259 ***	0.332 ***	0.296 ***	0.265 ***	0.320 ***
	(6.05)	(15.14)	(12.13)	(15.77)	(6.07)	(13.25)	(11.13)
Tang	0.050	0.038	0.110 *	−0.042	0.084	0.022	0.085
	(0.64)	(0.69)	(1.92)	(−0.68)	(0.70)	(0.43)	(1.07)
Top1	−0.006 ***	−0.005 ***	−0.004 ***	−0.006 ***	−0.005 **	−0.004 ***	−0.005 ***
	(−4.11)	(−4.78)	(−3.33)	(−7.09)	(−2.57)	(−5.19)	(−2.82)
Lev	−0.154	−0.002	−0.020	−0.221 ***	−0.143	0.044	−0.156 **
	(−1.41)	(−0.05)	(−0.33)	(−3.67)	(−1.19)	(0.76)	(−2.10)
Dual	−0.017	−0.015	0.004	−0.004	−0.023	−0.015	−0.004
	(−0.72)	(−1.25)	(0.23)	(−0.27)	(−0.83)	(−1.27)	(−0.24)
Inst	0.007 ***	0.009 ***	0.007 ***	0.010 ***	0.006 ***	0.006 ***	0.010 ***
	(8.08)	(16.47)	(12.66)	(20.38)	(5.91)	(12.39)	(13.21)
Constant	2.748 ***	2.674 ***	2.054 ***	2.310 ***	4.958 ***	4.612 ***	1.519 **
	(3.54)	(5.61)	(3.50)	(4.18)	(5.10)	(9.06)	(2.16)
Observations	4706	10,730	6723	6177	2536	7666	7770
R2	0.340	0.452	0.436	0.397	0.522	0.497	0.391
Number of id	805	2288	2219	2136	1428	1721	2185
Year FE	YES	YES	YES	YES	YES	YES	YES
Industry FE	YES	YES	YES	YES	YES	YES	YES
Adjusted R2	0.331	0.449	0.430	0.0638	0.513	0.493	0.386

Note: Robust t-statistics are reported in parentheses. *** p < 0.01, ** p < 0.05, * p <0.1.

(1), (2) indicate that the ESG coefficients for non-SOEs is larger than SOEs. The findings suggest that non-SOEs demonstrate a stronger association between sustainability efforts and value creation.

4.7.2. Life Cycle Stages

An enterprise can be viewed as a living entity that progresses through life cycle stages [67], each with unique challenges and opportunities. Drawing on the cash flow model proposed by Dickinson [67] and adopting the idea of Gao et al. [8]. We categorize the life cycle of Chinese A-share listed firms into three distinct phases: growth, maturity, and decline. We performed regression analyses on the samples at different stages to explore the heterogeneity of the effects at various developmental periods of the enterprise.

The results in Table 7, Columns (3) to (5) show that ESG performance positively affects the overall firm value in all three stages. However, this effect varies across stages, reflecting the impact of the stage of firm development on the importance of ESG strategies. The maturity stage (β = 0.418, p < 0.01) is the highest among the three stages.

4.7.3. Market Competition

In this study, we also explored the variability under different levels of market competition intensity. Specifically, we followed the methodology of Zhu and Wang [2] to evaluate the effect of ESG on overall value in two market environments by dividing the sample into two groups-high and low competition-using the median of the Lerner Index as the benchmark.

The findings in Table 7, Columns (6), (7) indicate that the beneficial effect of ESG on firm value is more significant in a more competitive market environment (β = 0.397, p < 0.01). Strong ESG performance substantially contributes to enhancing firm value, even in less competitive market environments (β = 0.224, p < 0.01).

5. Discussion

ESG performance has a significant positive impact on firm value. From a risk perspective, corporate scandals attract greater investor attention [68] and are more likely to trigger doubts about a firm’s future prospects [20]. Strong ESG performance, by contrast, signals lower risk and greater sustainability [69], thereby enhancing market expectations of future growth. In the Chinese context, the strengthening of regulatory enforcement and increasing investor attention to ESG further amplify this effect [70], as firms with excellent ESG performance are more likely to obtain financing and stronger policy support [71]. From a strategic perspective, an increasing number of firms have recognized ESG as a source of competitive advantage. According to the RBV, ESG provides both tangible and intangible resources that enable firms to build competitive advantages that are difficult for rivals to imitate [14], thereby driving firm value [72].

Innovation capability plays a significant mediating role in the relationship between ESG and firm value. Tsang et al. [73] point out that firms with high ESG performance can channel the knowledge and technologies they acquire into their innovation processes, thereby enhancing innovation capability and achieving superior innovation outcomes [74]. Thus, Innovation capability acts as the intermediate link through which ESG practices are transformed into firm value [21]. From the perspective of dynamic capabilities, innovation capability represents a dynamic capability [25] that enables firms to reconfigure resources and produce differentiated products to sustain competitive advantage. Therefore, the positive relationship between ESG and firm value is not only direct but also indirect, operating through the mechanism of innovation capability. This underscores the integrative nature of ESG as a system comprising environmental, social, and governance dimensions.

Further analysis shows that the positive effect of ESG on firm value is more pronounced in non-SOEs, firms in the maturity stage, and firms operating in highly competitive markets.

From the perspective of ownership, the differences between SOEs and non-SOEs in their roles, intrinsic motivations, and implementation strategies may account for this divergence. First, as implementers of national policies and active participants in the market, SOEs assume the dual role of promoting national strategic objectives and maintaining market competitiveness [22]. SOEs are encouraged to prioritize their social and environmental impact over direct economic benefits while fulfilling their responsibilities. This approach aligns with national strategies and reflects their role as policy implementers. In contrast, the ESG practices of non-SOEs are typically driven by a strong profit motive. Non-SOEs enhance their operational efficiency and market competitiveness by improving their corporate image, thereby realizing stable economic returns. This difference reflects the fundamental strategic choices of both types of firms and demonstrates the significant advantages of non-SOEs in receiving positive incentives by fulfilling their ESG responsibilities.

Second, SOEs maintain close and complex relationships with financial institutions, providing them with a natural advantage regarding access to resources [59]. In contrast, non-SOEs lack this natural advantage and must disclose more financial and nonfinancial information to obtain financial support. Therefore, fulfilling ESG responsibilities improves non-SOEs’ transparency and helps them gain support from governments, banks, and external stakeholders. Furthermore, SOEs often enjoy favorable policies regarding tax exemptions and land use for projects, thereby reducing their dependence on external customers and lowering their operational and financial risks to provide an advantageous position in the marketplace [75]. Simultaneously, non-SOEs create a positive social image and enhance market competitiveness by fulfilling ESG responsibilities.

Third, because the market expectation that SOEs will fulfill their ESG responsibilities is already high, the contribution to corporate performance in ESG enhancement is relatively low. For non-SOEs, positive ESG practices enhances their societal reputation while simultaneously bolstering their overall performance, demonstrating the importance and effectiveness of fulfilling ESG responsibilities.

From the perspective of the corporate life cycle. In the growth stage, firms usually experience rapid development with large resource investments and active ESG management, which can help enterprises build market competitiveness and consumer trust [76]. In the maturity stage, firms have stabilized their market position with stable cash flows [67,77]. Thus, by continuously improving ESG performance, firms can maintain a market leadership position [78] and enhance their competitive advantage through improved efficiency and reputation [79]. In the decline stage, complex internal and external environments cause firms to lack the intrinsic motivation to engage in ESG strategies, although this value is still significant. This suggests that, even in the decline stage of increased market and operational pressures, good ESG practices remain important in supporting firm value, helping firms remain resilient in the face of challenges or potentially underpinning transformation. This constitutes a novel finding in the context of related research.

From the perspective of market competition. Intense competition in a market strengthens the competitive advantage that firms can gain through ESG practices [80]. Furthermore, a firm’s focus on ESG initiatives is critical in enhancing value creation, as stakeholders—including consumers, investors, and others, place increasing importance on corporate responsibility. These findings support the RBV, suggesting that ESG represents an important initiative through which firms can acquire critical resources. By engaging in ESG practices, firms gain access to scarce resources such as reputational capital [17], social trust [81], policy support [82], and financing advantages [18]. These resources are often difficult for competitors to imitate or substitute, thereby forming the basis for differentiation and competitive advantage.

6. Conclusions

This study explores how corporate innovation capability mediates the link between ESG performance and firm value. A literature review and empirical testing combination provides a comprehensive analytical framework. The principal conclusions can be encapsulated as follows: (1) ESG substantially improves firm value. (2) Corporate innovation capability is a mediating factor linking firms’ ESG to firm value. (3) The results across different types of corporate ownership structures are difference. Specifically, ESG has a stronger promotion effect on firm value enhancement in non-SOEs than in SOEs. (4) ESG performance positively affects the firm value of an enterprise in all three life cycle stages; however, this effect varies by stage. ESG performance promotes firm value more in the maturity stage. (5) The impact varies according to the degree of market competition intensity. The impact on overall firm value is more significant in the high-competition group. And the results of the robustness test provide additional confirmation of the reliability and consistency of the findings, which not only increases their academic value but also provides policymakers with a solid basis for promoting ESG practices.

6.1. Theoretical Contributions

From a theoretical perspective, our study makes several important contributions.

First, based on the RBV, our empirical results demonstrate that ESG significantly enhances firm value. This finding strengthens the understanding of the relationship between ESG and firm value. And corroborates the RBV proposition that competitive advantage arises from resources and capabilities that are valuable, rare, inimitable, and non-substitutable. More importantly, our study extends the RBV by showing that ESG can be conceptualized as a strategic resource that firms are able to mobilize and transform into economic outcomes. Therefore, ESG is not only an institutional constraint but, once integrated into corporate strategy, also a resource that supports sustained competitive advantage.

Second, based on the DCT, we reveal the mediating role of innovation capability in the ESG and firm value relationship. The results indicate that ESG promotes firm value by enhancing firms’ innovation capability. As a dynamic capability, innovation capability enables firms to effectively integrate and reconfigure ESG related inputs, thereby transforming ESG practices into market-recognized outcomes while also improving internal performance. This extends the DCT by showing that firms can reconfigure technological and market resources as well as sustainability driven resources, thereby broadening its boundaries to adapt to the ESG context.

Third, the study contributes to the measurement of innovation capability. Unlike previous studies that commonly use total patent counts or R&D expenditures as proxies, we construct a weighted patent index. This approach not only improves measurement accuracy but also better aligns with the dynamic capabilities perspective on knowledge integration and resource transformation, providing a transferable tool for future research.

Fourth, through heterogeneity analyses, we identify the boundary conditions of ESG’s effect. The results show that the positive impact of ESG on firm value is stronger for non-SOE, firms at mature stage, and firms operating in highly competitive markets. This suggests that the effect of ESG as a strategic resource is not homogeneous but contingent on firm characteristics and external environments, thus offering a more contextualized explanation of the ESG–firm value relationship.

Finally, based on a sample of Chinese A-share listed companies, this study extends the applicability of RBV and DCT to the emerging market context. It broadens the theoretical boundaries of both frameworks, enabling them to explain sustainability-driven sources of advantage in emerging markets.

6.2. Practical Contributions

From a managerial perspective, the findings offer valuable guidance into leveraging ESG advantages to promote sustainable corporate development.

First, managers should view ESG as a compliance imperative and a strategic enabler of innovation. Integrating ESG principles into core business strategies enables companies to unlock fresh avenues for innovation. This is particularly relevant in sectors where the focus on sustainability is rapidly gaining significance. By aligning strategic priorities with environmental, social, and governance considerations, firms can position themselves to capitalize on emerging trends and meet evolving market demands.

Second, the influence of ESG on organizational outcomes differs depending on the characteristics of firms and the intensity of market competition. Thus, managers should customize their ESG approaches to align with the unique attributes of their firms and the prevailing dynamics of the market. ESG strategies should also be adapted to a firm’s life cycle stage. Regulators have the ability to create incentive mechanisms that motivate organizations to integrate ESG initiatives. By enhancing managerial awareness and capitalizing on potential opportunities, companies can achieve superior performance outcomes.

6.3. Limiations

This study includes limitations that suggest avenues for future investigation. First, although robustness checks were conducted using Bloomberg ESG scores, our main analysis relies on Huazheng ESG data, which is specifically designed to reflect the institutional and market environment of the Chinese market. While this makes it suitable for our sample, it may limit the generalizability of the finding to other countries or regions that adopt different ESG rating systems. Future research could conduct cross-country comparisons. Second, it utilized the entire patent count to indicate a firm’s innovation capability, employing a specific weighted scoring method. Although this approach has some validity, future research could explore more dimensional innovation indicators to assess innovation capability more comprehensively. Third, this study examines ESG as an overall index without differentiating between environmental, social, and governance dimensions. Since each dimension may exert heterogeneous effects on firm value and innovation capability, future research could explore each ESG dimension in depth. By addressing these constraints, future research can yield a more profound and comprehensive knowledge of how enterprises and policymakers can effectively leverage ESG practices to foster sustainable development.