Received: 19 August 2023 Revised: 23 December 2023 Accepted: 2 January 2024

DOI: 10.1002/bse.3692

RESEARCH ARTICLE

ESG ratings and green innovation: A U-shaped journey towards

sustainable development

Cunyi Yang 1 | Conghao Zhu 2 | Khaldoon Albitar 3

1
Lingnan College, Sun Yat-Sen University,
Guangzhou, China Abstract
2
International Business School, Tianjin Foreign This study examines the relationship between corporate ESG ratings and green inno-
Studies University, Tianjin, China
3
vation based on data from Chinese A-share listed companies for the period between
Faculty of Business and Law, University of
Portsmouth, Portsmouth, UK 2011 and 2022. The findings suggest a “U”- shaped relationship between ESG rat-
ings and green innovation. Companies with lower ESG ratings (referred to as “bad”
Correspondence
Conghao Zhu, International Business School, companies) tend to focus on improving their corporate governance and operational
Tianjin Foreign Studies University, Tianjin,
conditions, often at the expense of green innovation. However, as companies
China.
Email: [email protected] improve their ESG ratings, they increasingly view green innovation as a key growth
area. This relationship is particularly evident in companies with low profitability and
Khaldoon Albitar, Faculty of Business and Law,
University of Portsmouth, Portsmouth, UK. high operational risks. Additionally, we explore the impact of corporate ESG ratings
Email: [email protected] on different types of green patents. The study finds that “bad” companies can miti-
Funding information gate the negative impact on green innovation through collaborative efforts, while
National Natural Science Foundation of China,
non-inventive green innovations, they benefit from independent research and devel-
Grant/Award Numbers: 71721001, 72371256;
Excellent Young Team Project Natural Science opment. Furthermore, the study examines the role of government subsidies and
Foundation of Guangdong Province of China,
executive compensation in influencing this relationship. The results show that gov-
Grant/Award Number: 2023B1515040001
ernment subsidies can both positively and negatively affect green innovation,
depending on the company's operational status and ESG rating. The results provide
valuable insights for companies, investors, and policymakers regarding the significant
role of ESG scores in promoting green innovation and suggest strategies to enhance
corporate sustainability performance.

KEYWORDS
ESG ratings, government subsidy, green innovation, sustainable development

1 | INTRODUCTION

In recent years, the concept of Environmental, Social, and Governance

Abbreviations: CDP, Carbon Disclosure Project; ESG, Environmental, social, and Governance; (ESG) has experienced rapid growth and widespread acceptance glob-
GRI, Global Reporting Initiative standards; KPIs, Key Performance Indicators; SFDR,
ally, particularly in developed countries (Daugaard, 2020). Numerous
Sustainable Finance Disclosure Regulation; TCFD, Task Force on Climate‐related Financial
Disclosures. institutional investors and fund managers now consider ESG factors

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© 2024 The Authors. Business Strategy and The Environment published by ERP Environment and John Wiley & Sons Ltd.

Bus Strat Env. 2024;1–22. wileyonlinelibrary.com/journal/bse 1

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2 YANG ET AL.

as integral components of their investment decision-making process of enterprises themselves but also an important measure for enter-
(Broadstock et al., 2021; Gillan et al., 2021). They recognize that, in prises to undertake environmental responsibilities and promote green
addition to yielding long-term financial returns, incorporating ESG fac- development. Therefore, how enterprises carry out green innovation
tors can manage potential risks and exert a positive impact on society activities and what factors affect enterprises' green innovation is
and the environment. Moreover, regulatory bodies have played a piv- worth in-depth exploring.
otal role in propelling the development of ESG (Drempetic Contemporary research has extensively explored the intricate
et al., 2020; Gillan et al., 2021; Zhai et al., 2022). For instance, the relationships between financial markets, corporate governance, policy
European Union's Sustainable Finance Disclosure Regulation (SFDR) and regulation, corporate finance, and stock performance, with corpo-
mandates financial market participants to disclose how their products rate Environmental, Social, and Governance (ESG) practices. From a
interact with ESG factors. This legislation not only enhances transpar- financial market perspective, Alda (2019) discovered that companies
ency but also drives the industry's focus toward sustainable invest- holding a larger share of pension funds are more likely to employ
ment. Under regulatory impetus, various industry standards and rating renewable energy and disclose environmental information. Barros
systems have emerged, such as the Global Reporting Initiative (GRI) et al. (2022) observed that mergers and acquisitions have no signifi-
standards, the Carbon Disclosure Project (CDP), and recommenda- cant impact on ESG ratings in the year of transaction completion, but
tions from the Task Force on Climate-related Financial Disclosures they play a pivotal role in enhancing ESG performance in the subse-
(TCFD). quent year. Tampakoudis and Anagnostopoulou (2020) found that
In contrast, China, though a latecomer in ESG ratings with its first acquirers' ESG performance improves following the acquisition of tar-
ESG ratings appearing only in 2015 (Broadstock et al., 2021), is rapidly gets with previously poor performance. Apergis et al. (2022) revealed
catching up, particularly in terms of government impetus and policy a correlation between superior ESG ratings and lower costs of unse-
formulation. Many policies have been implemented to promote the cured debt in the initial bond market. Barros et al. (2023) identified a
disclosure of ESG information and the construction of rating systems. close link between higher ESG ratings and the likelihood of higher div-
For example, in September 2018, the China Securities Regulatory idend payments, the stability of payout amounts, and shareholder
Commission revised the “Corporate Governance Guidelines for Listed returns from dividend yields.
Companies,” establishing a basic framework for ESG information dis- In terms of corporate governance, Bravo and Reguera-Alvarado
closure in China for the first time. In December 2020, the “Environ- (2019) found a positive correlation between gender diversity in audit
mental Information Legal Disclosure System Reform Plan” approved committees and the quality of voluntary ESG reporting. De Masi et al.
by China's Central Comprehensive Reform Commission proposed that (2021) noted that a critical mass of female board members positively
by 2025, a mandatory environmental information disclosure system impacts every component of ESG ratings. Eccles et al. (2013) posited
will be essentially formed. In May 2022, the State-owned Assets that focusing on issues most “substantial” to shareholder value in
Supervision and Administration Commission of the State Council products, processes, and business models, coupled with significant
issued the “Plan to Improve the Quality of Central Enterprises Holding innovation in these areas, could concurrently elevate financial and
Listed Companies,” explicitly requiring central enterprises ESG performance. Gebhardt et al. (2023) discovered that implement-
holding listed companies to implement new development concepts ing ESG Key Performance Indicators (KPIs) within internal manage-
and explore establishing a comprehensive ESG system. Besides, ment systems enhances ESG performance.
Chinese enterprises face dual pressures of economic transformation From a policy and regulatory standpoint, Zhang et al. (2023)
and sustainable development. The impact mechanism of ESG ratings found that interruptions in environmental subsidies significantly posi-
on Chinese enterprises' development differs from developed coun- tively impact corporate ESG performance. Meng et al. (2023) indi-
tries and needs further exploration. cated that collusion between national entities and corporations
In recent years, China's economy has transitioned from a high- exacerbates air pollution by hindering ESG fulfillment, with a more
speed growth stage to a high-quality development stage (Zhou pronounced effect in heavily polluting enterprises than in industrial
et al., 2020). As a new development concept, high-quality develop- firms. In terms of corporate finance, Conca et al. (2021) established a
ment, characterized by innovation, greenness, coordination, openness, positive relationship between strict environmental and social informa-
and sharing, provides an important guarantee for sustainable eco- tion disclosure and corporate profitability. Dmuchowski et al. (2023)
nomic development and forms a global development consensus. For observed a positive correlation between ESG factors and corporate
enterprises, how to achieve green and sustainable development has financial performance, more pronounced over a longer term. Sandberg
become a focus of attention. As environmental issues become et al. (2023) found that higher ESG ratings are associated with better
increasingly severe, enterprises also face green transformation pres- asset return on assets (ROA) and return on equity (ROE). He, Ding
sures from the government, all sectors of society, and even con- et al. (2023) noted that ESG ratings significantly reduce corporate
sumers. Green innovation, as a type of innovation, helps enterprises risk-taking, while Tarulli et al. (2023) found that higher levels of disclo-
achieve green transformation, improve resource utilization efficiency, sure effectively reduce corporate financial burdens.
and reduce pollution emissions through the development of green Regarding stock performance, Tamayo-Torres et al. (2019) identi-
technology, green products, and services (Zheng et al., 2023). fied a positive relationship between the governance dimension and
Green innovation is not only crucial for the sustainable development Tobin's Q, a negative and significant relationship with the social
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YANG ET AL. 3

dimension, and an insignificant relationship with the environmental highlight a generally positive association between innovation and the
dimension. Zhou et al. (2022) demonstrated that improvements in impact of ESG. However, some research indicates that, in certain
listed companies' ESG performance enhance their market value, with instances, corporate ESG might yield adverse effects. Particularly
a distinct mediating effect of financial performance. Additionally, noteworthy is the near absence of exploration into the potential nega-
operational capabilities serve as a crucial mediating pathway through tive effects of ESG scoring on green innovation, suggesting a certain
which ESG performance affects company market value. void in research. Notably, current literature lacks an analysis of the
In addition, a multitude of studies have delved into the relation- negative impacts of corporate ESG scoring on green innovation, espe-
ship between corporate ESG and innovation. Eccles et al. (2013) sug- cially a thorough examination of under what circumstances ESG scor-
gest that by concentrating on issues of paramount importance to ing might produce positive effects and in what conditions negative
shareholder value and pioneering substantial innovations in products, effects might be observed. Therefore, we aim to bridge this gap by
processes, and business models to prioritize these issues, it is feasible conducting a comprehensive investigation into the complex relation-
to simultaneously enhance financial and ESG performance. Engle et al. ship between corporate ESG scoring and green innovation, particu-
(2020) employed third-party ESG ratings to simulate a company's cli- larly delving into the potential fluctuations across different stages of
mate risk exposure, finding notable performance in innovating within ESG scoring. Such scholarly endeavors will contribute to a more
and outside the hedge sample in response to climate news. He, Zhao nuanced and comprehensive understanding of how ESG ratings
and Zheng (2023) discovered that the innovation compensation effect influence corporate green innovation, thereby offering invaluable
can exponentially augment the impact of environmental protection insights for academic research and practical application in related
tax law on corporate ESG. Li et al. (2023) observed that focal compa- fields.
nies' ESG in their industry possesses a significant green innovation This study contributes significantly to the current literature in
spillover effect, achieved by alleviating financing constraints and several ways. Firstly, this study uncovers a positive U-shaped relation-
enhancing environmental enforcement awareness among peer compa- ship between a company's ESG (Environmental, Social, and Gover-
nies. Liu and Zhang (2023) identified that managerial myopia could nance) rating and its green innovation, highlighting how “bad”
negatively influence ESG engagement through corporate innovation. companies focus on improving corporate governance to enhance their
Long et al. (2023) noted that an enhancement in national ESG perfor- ESG scores while “good” companies invest heavily in green innovation
mance significantly fosters green innovation. Wang et al. (2023) found as part of their growth strategy. Secondly, the study analyzes the rela-
that companies covered by ESG rating agencies saw a significant 3.9% tionship between corporate ESG ratings and various types of green
increase in green innovation output, primarily reflected in the growth patents, revealing that “bad” companies can mitigate the negative
of green invention patents. Wu et al. (2023) discovered a positive cor- impacts of ESG development on green inventive innovations through
relation between the shared ESG activity preferences among clus- collaboration while realizing the positive effects of ESG ratings on
tered institutional investors and corporate low-carbon innovation. green innovation through independent research and development.
Zheng et al. (2023) found a long-term bidirectional co-movement Thirdly, by differentiating between profitability and operational risks,
between ESG performance and corporate green innovation output. the research finds that the positive U-shaped relationship between a
Existing research often assumes a linear relationship between company's ESG rating and green innovation predominantly exists in
corporate ESG and various variables. However, some studies argue groups with low profitability and high operational risks, suggesting
that the impact of corporate ESG is not merely a straightforward lin- that companies with lower ESG ratings tend to focus their resources
ear relationship. For instance, Broadstock et al. (2019) found that on strengthening corporate governance. Lastly, the study delves into
advanced ESG policies and disclosure levels correlate positively with a the impact of government subsidies and corporate executive compen-
company's ecological efficiency, but only up to a certain point, beyond sation levels on the ESG-green innovation relationship, discovering
which the effect becomes “neutral,” demonstrating a clear pattern of that excessive subsidies can lead to an inverted U-shaped relationship,
diminishing marginal returns in ESG performance. Kumar et al. (2022) indicating the need for balanced subsidy strategies to encourage
discovered a significant inverted U-shaped relationship between cor- green innovation effectively.
porate sustainability performance, its reporting practices, and financial The remainder of this paper is organized as follows: Section 2
performance. Long et al. (2023) observed that improvements in envi- reviews the existing theories on the impact of corporate ESG on green
ronmental and governance performance significantly promote green innovation and proposes the theory and research hypotheses of this
innovation yet in countries with weaker green innovation capabilities, paper. Section 3 describes the empirical research design, including
enhancements in social performance reduce green innovation output. data sources and sample processing, model setting and variable defini-
Conca et al. (2021) identified a negative impact between company tion, and descriptive statistics and analysis. Section 4 presents and
market value and governance disclosure practices, with a negative analyzes the empirical results, including the benchmark and endo-
and significant relationship between the social dimension and Tobin's geneity treatment. Section 5 provides further analysis, including ESG
Q. Bhandari et al. (2022) found that the relationship between sus- sub-item research, heterogeneity analysis, and moderating mecha-
tained competitive advantage and ESG footprint is concave. nisms analysis. Finally, Section 6 summarizes the research conclusions,
Previous literature has unveiled a predominantly positive correla- policy implications, limitations, and scope for future research. The
tion between corporate ESG and a myriad of factors. Studies also appendix shows the robustness test results.
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4 YANG ET AL.

2 | THEORETICAL ANALYSIS AND investment rather than a cost, bringing positive returns for employees,
R E S E A RC H H Y P O T H E S E S investors, and other stakeholders (Claessens, 2006), demonstrating
good social responsibility performance helps attract excellent human
2.1 | The impact of ESG ratings on green resources to participate in productive activities (Barnea & Rubin, 2010;
innovation performance Kostant, 1999), thereby promoting the company's green innovation.
While green innovation is paramount for a company's sustainable
Viewed through the lens of ESG, within the paradigm of neoclassical development, given its long-term process, high uncertainty, and
theory, acompany's obligation is to maximize profits through the lawful expensive transitional costs (Berrone et al., 2013), companies face a
and ethical use of resources, conceiving any other activities that critical decision-making juncture in addressing environmental conser-
obstruct the maximization of shareholder value as unacceptable vation challenges. This decision entails choosing between directly pur-
(Xu et al., 2021). Concurrently, neoclassical theory postulates that the chasing existing green technology equipment on the market or
returns from ESG activities will not surpass their costs investing in proprietary research and development to seek innovative
(Friedman, 2007). ESG embodies a company's comprehensive consider- solutions. Firstly, acquiring ready-made green technology equipment
ations in sustainability, social responsibility, and governance, typically can bring immediate environmental benefits to a company, while
viewing environmental investments or social responsibility activities reducing the uncertainties and resource consumption inherent in the
exceeding the statutory minimum standards as generating additional R&D process. However, this approach might restrict the company's
costs, thus diminishing corporate value. Indeed, as noted by (Kim & capacity for independent innovation in green technology and the
Lyon, 2015), “The entire environmental regulation paradigm is built on establishment of long-term competitive advantages. Secondly, in-
the idea that firms must be forced into environmental improvements, house development of green technologies requires substantial initial
as they would otherwise find these improvements expensive or unprof- investment and entails greater risks, yet it could endow the company
itable and hence would not undertake them voluntarily.” Conversely, with more enduring competitive advantages and deeper market
modern corporate theory often posits that ESG can contribute to a insights. Finally, due to the positive externalities of green innovation,
company's long-term development. For instance, Stakeholder Theory companies engaging in such activities cannot reap all the benefits,
proposes that companies should create value not only for shareholders allowing competitors to replicate or benefit from the innovations at a
but also for all stakeholders, encompassing employees, consumers, local lower cost (Nie et al., 2021). Therefore, companies must meticulously
communities, natural resources, and environmental resources weigh the short-term and long-term benefits (risk-adjusted) of both
(Freeman, 1984). According to this theory, companies should consider options, as well as their affordability.
environmental initiatives when crafting business strategies, thereby We delve into the relationship between a company's Environmen-
obtaining long-term economic benefits from competitive advantages. tal, Social, and Governance (ESG) scoring and green innovation, partic-
From a green innovation perspective, neoclassical theory suggests ularly considering how the company's current status—distinguished as
that green innovation involves more investment and a longer return “good” companies (with higher ESG ratings) versus “bad” companies
period and that investment returns do not exceed their costs, thereby (with lower ESG ratings)—affects this relationship.
discouraging more green innovation investments. However, modern For “good” companies, which generally have achieved commend-
corporation theory posits that due to the more significant investment, able operational performance and possess relatively stable financial
longer return period, externalities caused by the two attributes of conditions, previous investments in fixed assets and conventional
“innovation” and “green,” and greater risk involved with green inno- innovation have been successful. Yet, facing evolving market develop-
vation investment compared to fixed asset investment, green innova- ments and fierce competition, further traditional investments may no
tion investment could impede short-term business performance and longer yield significant returns. Thus, these companies need to iden-
make managers reluctant to invest in green innovation and disclose tify new growth avenues, with green innovation emerging as a pivotal
green innovation information (Zhai et al., 2022). However, green inno- potential area. By investing in green technologies and sustainable
vation investment could benefit long-term business performance, and development projects, these firms can not only realize positive Net
companies need to overcome managerial short-sightedness Present Value (NPV) but also enhance their market recognition and
and actively invest in green innovation. level of sustainable development.
Existing theories suggest that a company's development of ESG Conversely, “bad” companies, possibly grappling with operational
ratings can promote green innovation in the company. Firs, based on difficulties and financial challenges, may find that investments in
Stakeholder Theory and Signal Transmission Theory, good corporate green innovation carry substantial risks, with benefits requiring a lon-
ESG performance helps shape corporate image and reputation ger time to materialize and offering limited immediate improvements
(Barnea & Rubin, 2010; Flammer, 2015), social responsibility reports to the enterprise. Additionally, due to prevalent information asymme-
provide non-financial information, reducing information asymmetry try and moral hazards between enterprises and investors, investors
between investors and managers (Cui et al., 2018), alleviate financing approach the disclosure of green innovation projects with caution,
constraints, broaden sources of funds (Lenz et al., 2017), thus laying the leading to higher financing costs and restricted R&D investment funds
foundation for the development of green innovation. Secondly, from (Hoffmann & Kleimeier, 2021). This scenario is more acute in “bad”
the perspective of Resource Dependence Theory, ESG is essentially an companies, and given that their primary task often involves stabilizing
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YANG ET AL. 5

operational conditions, they are more inclined to invest directly in inventive green innovations emerges as an effective strategy to meet
fixed assets and conventional innovation, aiming to achieve positive environmental protection standards amidst the pressure to do
NPV and improve company performance. Therefore, investing in so. Despite their lower technological content, non-inventive green
green innovation may not be a strategic choice for these “bad” com- innovations, with their relatively lower R&D difficulty and risk, can
panies in the short term. effectively reduce financial inputs, thereby positively impacting the
In summary, the influence of ESG scoring on green innovation improvement of company operations. Hence, “bad” companies might
essentially represents a balancing act between costs and benefits. For prefer to allocate resources to develop such innovations to comply
“bad” companies, can reap benefits from fixed assets and conven- with legal and regulatory requirements.
tional innovation by improving management levels and enhancing For “good” companies, which have already achieved commend-
governance capabilities, thereby accumulating capital. However, for able operational performance, there is greater flexibility in terms of
these companies, the high costs and uncertain risks associated with green innovation. These companies, in the process of developing their
green innovation mean that in the process of enhancing ESG, the ESG ratings, will increase their investment in green innovation, not
costs of green innovation may outweigh its benefits. On the other only fostering the growth of inventive green innovation but also pro-
hand, for “good” companies, the decision to invest in green innovation moting non-inventive green innovation. The technological and
is more definitive, as they have recognized that returns on invest- production efficiency advantages of inventive green innovations may
ments in other areas are diminishing and that green transformation further consolidate these companies' market-leading positions, align-
and innovation are key trends for future development, with benefits ing with their long-term sustainable development strategies.
greatly exceeding the costs. For “bad” companies, while there may be Green innovation can be further subdivided into independent
a need to focus on improving operational conditions in the short term, green innovation and collaborative green innovation. In the realm of
from a long-term perspective, as these companies improve and transi- inventive green innovation, “bad” companies may find it challenging
tion to “good” companies, they should consider incorporating green to independently undertake green innovations. However, through col-
innovation into their strategic planning to achieve long-term sustain- laboration with “good” companies, they can leverage their partners'
able development goals. Ultimately, the role of ESG scoring in promot- technology and resources to achieve higher investment returns. This
ing corporate green innovation will be influenced by the company's collaborative approach helps mitigate the challenges these companies
own conditions and long-term strategic planning. This differentiated face in improving their ESG ratings. For “excellent” companies,
strategy reflects the complexity and diversity of enterprises in addres- despite their technological and resource advantages, collaboration
sing environmental challenges and pursuing sustainable development. might diminish their role in enhancing ESG ratings through green
Therefore, we propose the following hypothesis: innovation, as the contributions from partners may be minimal.
In the case of non-inventive green innovation, given the lower
Hypothesis 1. In companies with low ESG ratings, the R&D complexity, companies might perceive the costs and complexi-
development of ESG scoring will reduce their level of ties of collaboration as unnecessary, hence preferring independent
green innovation, while in companies with high ESG rat- innovation. For “bad” companies, operational challenges and resource
ings, the development of ESG scoring will enhance their constraints may lead them to reduce collaboration in this field. In con-
green innovation level. In other words, there is a posi- trast, “good” companies, with their strong reputation and robust R&D
tive “U” shaped relationship between a company's ESG capabilities, are more likely to engage in collaborative efforts in non-
scoring and green innovation. inventive green innovation to achieve a broader market impact.
Therefore, the following hypotheses are proposed:

2.2 | The impact of ESG on various green patents Hypothesis 2. There is a positive “U” shaped relation-
ship between a company's ESG rating and both indepen-
In prior research and practice, green innovation has been categorized dent and collaborative inventive green innovation. For
into two major types: inventive green innovation (such as green pat- inventive green innovation, companies with low ESG rat-
ent technology) and non-inventive green innovation (like utility model ings can mitigate the negative impact of their ESG rat-
patents) (Wang et al., 2023; Xu et al., 2021). Typically, inventive green ings on the level of green inventive innovation through
innovations significantly enhance a company's technological sophisti- collaboration; for non-inventive green innovation, low
cation and production efficiency, playing a pivotal role in sustainable ESG rating companies can achieve a positive impact on
corporate development (Fang et al., 2017; Quan et al., 2021). How- green innovation levels through independent R&D.
ever, compared to non-inventive green innovation, inventive green
innovations usually require greater financial investment, accompanied Hypothesis 3. The relationship between a company's
by higher research and development complexity and risk. ESG rating and independent non-inventive green inno-
Especially for “bad” companies facing operational challenges, vation is not a positive “U” shape, but it is a positive
striving to improve their ESG ratings and rectify company manage- “U” shape with collaborative non-inventive green
ment issues becomes critical. In this context, developing non- innovation.
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6 YANG ET AL.

3 | RESEARCH DESIGN level of green innovation cooperatively by the company. In order to

control the lag impact of ESG on corporate green innovation and the
3.1 | Data source and sample processing endogeneity caused by reverse causality, the explained variables in
this study are forward-shifted by one period.
Given the limitations of ESG and corporate green patent data, we Independent Variables (ESGi,t , ESGPFi,t ). ESGi,t is the Bloomberg
select Chinese A-share companies listed on the Shanghai and Shenz- ESG rating of the company i in year t, and ESGPFi,t is the square of the
hen stock exchanges from 2011 to 2022 as the sample for research. Bloomberg ESG rating of company i in year t. Currently, Bloomberg
The data on corporate green innovation is obtained by matching the collects about 300 data points from approximately 11,000 companies
research data of green invention patents and utility model patents in 63 countries. By screening publicly available information sources,
issued by the China National Intellectual Property Administration with Bloomberg assesses the extent to which each company discloses its
the green patent data of listed companies in the CNRDS database. Environmental, Social, and Governance (ESG) activities. Bloomberg's
The green patent data mainly comprises four categories: indepen- data points are weighted according to their importance and come
dently obtained green invention patents, independently obtained from company reports, such as CSR reports, annual reports, and cor-
green utility model patents, collaboratively obtained green invention porate websites, thus reflecting the range of information disclosed to
patents, and collaboratively obtained green utility model patents. The investors. Based on the collected data points, and adjusted according
ESG data is derived from Bloomberg's Environmental, Social, and Cor- to industry conditions, Bloomberg estimates that the disclosure score
porate Governance database. All other data is sourced from the ranges from 0.1 (lowest) to 100 (highest).
CSMAR database. The independent variables ESGi,t and ESGPFi,t represent a com-
To ensure the accuracy of the data, the following selection cri- pany's ESG metrics. ESGi,t is the Bloomberg ESG rating for company i
teria were applied: (1) exclusion of the financial and real estate indus- in year t, while ESGPFi,t is the square of the Bloomberg ESG rating for
tries; (2) exclusion of companies that have been delisted or suspended company i in year t. The Bloomberg ESG rating is a composite index
from listing within one year of their listing, exclusion of companies designed to evaluate a company's performance in three critical areas:
listed on the Beijing Stock Exchange, exclusion of ST-type companies; environment, social, and governance. In terms of environmental
(3) exclusion of corporate values with negative operating income and aspects, the score considers factors such as energy use, waste man-
total assets; (4) exclusion of observations with missing independent agement, and emission control. These metrics reflect a company's
and dependent variables; (5) for the missing values of Control vari- commitment and efficiency in environmental practices and resource
ables, the interpolation method (extrapolation) is used to supplement management. The social score encompasses areas like labor standards,
them. Eventually, 1,330 companies were obtained, resulting in 10,348 product responsibility, and community engagement. This segment
company-year observations. assesses the company's impact and contributions to its employees,
customers, and the communities in which it operates. The governance
score focuses on various aspects of corporate governance, including
3.2 | Model specification and variable definition the diversity and independence of the board, executive team compen-
sation policies, and the company's transparency and shareholder
In order to examine the impact of ESG performance on the level of rights. Importantly, Bloomberg's ESG scoring not only considers a
corporate green innovation, we construct the following model: company's disclosure of information in these key areas but also mea-
sures its actual performance.1 Therefore, this scoring provides a com-
X
GIi,tþ1 ¼ α0 þ α1 ESGi,t þ α2 ESGPFi,t þ γControlsi,t þ Year t prehensive perspective to assess a company's overall performance in
X t
þ i
Individuali þ εi,t ð1Þ environmental, social, and governance aspects.
Control Variables (Controlsi,t ). Following Wang et al. (2023), we
Where the subscripts i and t represent the sample individual and control for company size (Size), company leverage (Lev), company
the year respectively. return on assets (ROA), company revenue growth rate (Growth), com-
Dependent Variable (GIi,tþ1 ). The dependent variables in this pany long-term asset ratio (PPE), company operating net cash ratio
study include five indicators: the number of green patents obtained (CFO), company age (Age), largest shareholder shareholding
(Green_GET i,tþ1 ), reflecting the overall green innovation level of the
1
In the methodology and domain information of the Bloomberg ESG rating, it is mentioned
company; the number of green invention patents obtained indepen-
that “If any input field value is missing, the company receives the lowest score among all
dently (Green_GET I,NU
i,tþ1 ), reflecting the level of high-quality green inno- possible scenarios.” Furthermore, the Bloomberg scoring explanation also states, “In general,
field scoring is determined from guidance provided by Bloomberg research on best practices,
vation autonomously by the company; the number of green invention
corporate governance frameworks, and industry practitioners. Typically, the guidance takes
patents obtained collaboratively (Green_GET I,U
i,tþ1 ), reflecting the gen- the form of a best or worst governance practice. Categories are mapped to numerical values,
eral level of green innovation autonomously by the company; the so that best practices attain a score of 7 and up and worst practices attain scores of 3 and
below, with significant ground in between.” This implies that the Bloomberg score is a
number of green utility model patents obtained collaboratively comprehensive index encompassing various indicators' disclosure and performance. The
(Green_GET NI,NU
i,tþ1 ), reflecting the level of high-quality green innovation
scoring system effectively integrates an assessment of both the company's transparency in
reporting its activities and the substantive quality of these actions, thereby offering a
cooperatively by the company; the number of green utility model pat-
nuanced and detailed evaluation of a company's commitment and effectiveness in
ents obtained collaboratively (Green_GET NI,U
i,tþ1 ), reflecting the general environmental, social, and governance aspects.
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
YANG ET AL. 7

ratio (Top1), and Tobin's Q value of the company (TobinQ). In order to represents the double-fixed effect model without the inclusion of
control for the impact of individual and macroeconomic conditions on control variables; the second column denotes the random effects
the level of corporate innovation, we also control for individual model excluding control variables (with the exception of year dummy
(Individual) and year (YEAR) fixed effects. ε represents the random variables); and the third column signifies the double-fixed effect
error term. Table 1 defines and calculates the main variables. model incorporating control variables.
Based on the analysis results in Table 3, we observed that in col-
umns 1, 2, and 3, the ESG coefficient is significantly negative, while
3.3 | Descriptive statistics and analysis the coefficient of ESGPF (ESG rating squared) is significantly positive.
This indicates a positive U-shaped relationship between a company's
The present treatise conducts a comprehensive descriptive statistical ESG rating and green innovation, thereby validating our Hypothesis 1.
analysis of the primary variables. To illustrate, the mean values for the This suggests that “bad” companies (those with lower ESG ratings)
independent green invention patents obtained in the subsequent year reduce green innovation in the process of improving their ESG ratings,
(F1.Green_GETI,NU), collaborative green non-invention patents acquired whereas “good” companies (those with higher ESG ratings) increase
in the following year (F1.Green_GETI,U), joint green invention patents green innovation.
NI,NU
gained in the year after (F1.Green_GET ), and cooperative green We speculate that this may be due to the fact that green innova-
non-invention patents earned in the next year (F1.Green_GETNI,U) are tion often requires a longer investment and payback period, as well as
respectively 0.4444, 0.8295, 0.1814, and 0.2580. Viewed through the carries higher risk (Li et al., 2023; Wang et al., 2023). “Bad” compa-
prism of independent research and development (R&D) versus collabo- nies, facing significant operational pressures, tend to adopt measures
rative R&D, enterprises predominantly tend to favor the independent that can immediately improve their operational conditions. This leads
development of green patents. This indicates a potential involvement to a preference for directly acquiring relevant equipment to meet
of core technologies and key innovations in the field of green technol- environmental regulatory requirements rather than resolving environ-
ogy, suggesting that companies are inclined towards independent R&D mental issues through prolonged research and development. This ten-
to safeguard and control their intellectual property rights. dency reflects the practical needs of “bad” companies to respond to
Assessing the enterprise's R&D in invention and non-invention pat- regulatory pressures in the short term and also reveals a predilection
ents, it is observable that firms are currently more engaged in the devel- for quick solutions rather than investing in long-term R&D and inno-
opment of non-invention green patents. This underscores that vation. While this approach may swiftly meet current regulatory
businesses, in the process of green technology innovation, place a demands, it could limit the company's long-term development poten-
greater emphasis on improvements and applications based on pre- tial in environmental technologies and sustainable growth. Further-
existing technology. This approach allows for a swift response to mar- more, this strategy may lead to an over-reliance on external
ket demand, propelling sustainable development objectives, while technology, neglecting the cultivation of internal R&D capabilities and
accentuating technology's practicality, thereby satisfying the equilibrium technological innovation. In the long run, this might impact the com-
between societal environmental demands and business strategy more pany's competitiveness in the market, especially in today's context
effectively. The average value for ESG (Environmental, Social, and Gov- where environmental standards are continually rising, and green tech-
ernance) stands at 28.4675, indicating that the majority of enterprises nology is increasingly important. Therefore, companies should balance
exhibit a certain degree of concern and performance in environmental, short-term adaptation with long-term sustainable development strate-
social, and governance aspects. The standard deviation of ESG is 8.96, gies when considering meeting environmental regulatory require-
ranging from a minimum of 9.91 to a maximum of 68.92, reflecting con- ments, and find an appropriate balance between internal R&D and
siderable variances in ESG performance among different enterprises. external technology acquisition. This will ensure compliance with
Some companies might display a heightened sense of responsibility and environmental regulations while laying a solid foundation for the com-
enthusiasm concerning environmental, social, and governance aspects, pany's future development.
while others need to further elevate their performance (Table 2). In contrast, “good” companies, typically having achieved com-
mendable operational performance and possessing relatively stable
financial conditions, have the capacity to bear the costs required for
4 | EMPIRICAL RESULTS AND DISCUSSION green innovation. For these companies, green innovation is not only a
new point of return growth but also an important pathway to achieve
4.1 | Baseline regression results2 high-quality and sustainable corporate development. Therefore, in
their efforts to enhance their ESG ratings, these companies adopt a
Table 3 presents the baseline regression results of the impact of a positive attitude towards green innovation, investing substantial funds
company's ESG rating on its overall level of green innovation. In in green R&D to improve the level of corporate green innovation.
Table 3, we employed three groups of regressions: the first column Additionally, referencing the research method of (Yu et al.,
2021), we used the regression results of the third column in Table 3
2 to visualize the impact of companies' ESG rating on green innova-
To make the coefficients of the regression results more aesthetically pleasing, the
dependent variable is multiplied by 100 before performing the regression. tion in Figure 1. In this figure, we estimated the turning point of
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
8 YANG ET AL.

TABLE 1 Main variables and definitions.

Abbr. Variable name Calculation method

Green_GET Green patent acquisition Natural log of the total number of green patents obtained by the company in the
following year +1
Green_GETI,NU Independent Acquisition of Green Natural log of the total number of independent green invention patents obtained by the
Invention Patents company in the following year +1
Green_GETNI,NU Independent Acquisition of Green Natural log of the total number of independent green utility model patents obtained by
non-invention Patents the company in the following year +1
Green_GETI,U Cooperative Acquisition of Green Natural log of the total number of collaborative green invention patents obtained by the
Invention Patents company in the following year +1
Green_GETNI,U Cooperative Acquisition of Green Natural log of the total number of collaborative green utility model patents obtained by
non-invention Patents the company in the following year +1
ESG ESG performance ESG performance of the company in the current year
Size Company size Natural log of the book value of the company's assets at the end of the current year
Lev Company leverage The ratio of total liabilities to total assets of the company at the end of the current year
ROA Company return on assets After-tax net profit/total assets of the company at the end of the current year
Growth Company revenue growth rate The ratio of the company's operating income at the end of the current year to the
operating income at the end of the previous year
PPE Company Long-term asset ratio The ratio of fixed assets to total assets of the company at the end of the current year
CFO Company operating net cash ratio The ratio of operating net cash flow to total assets of the company at the end of the
current year
Age Company age Number of years the company has been listed
Top1 Largest shareholder ownership ratio The ratio of the shares held by the largest shareholder of the company to the circulating
shares
TobinQ Company Tobin's Q value The ratio of the company's stock market value at the end of the year to total assets

TABLE 2 Descriptive statistics.

Variable Sample size Mean Std Min Max
F1.Green_GET 10,348 1.1130 1.3249 0.0000 7.0519
I,NU
F1.Green_GET 10,348 0.4444 0.8543 0.0000 6.4754
F1.Green_GETNI,NU 10,348 0.8295 1.1284 0.0000 6.2086
NI,U
F1.Green_GET 10,348 0.1814 0.5821 0.0000 6.6758
F1.Green_GETNI,U 10,348 0.2580 0.7021 0.0000 5.7557
ESG 10,348 28.4675 8.9615 9.9085 68.9166
ESGPF 10,348 890.6996 599.4098 98.1784 4749.4980
Age 10,348 18.3593 5.8543 1.0000 54.0000
Size 10,348 23.1628 1.3119 19.5234 28.6365
Lev 10,348 0.4628 0.1946 0.0075 1.2796
ROA 10,348 0.0486 0.0643 0.5563 0.6042
PPE 10,348 0.2378 0.1778 0.0000 0.9709
CFO 10,348 0.0633 0.0716 0.4630 0.7255
Top1 10,348 37.1555 16.3196 3.3900 89.9900
STAFF 10,348 7.5289 1.3519 1.9459 13.1095
TobinQ 10,348 2.4681 2.3333 0.5439 34.0092

the company's ESG rating to be 21.6, with the change value of for most sample companies, improving the ESG rating helps to pro-
green innovation at the turning point being 0.2284. Figure 1 mote green innovation. It is noteworthy that most previous litera-
clearly shows that most of our sample companies are located to the ture studying the relationship between ESG and green innovation
right of the turning point (77.23% of the samples are on the right did not consider the quadratic term of ESG, which might explain
side of the turning point). In our study, the average (median) ESG why most previous ESG studies concluded a positive linear relation-
rating of our sample companies is 27.3564 (28.4675), indicating that ship (Xu et al., 2021).
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
YANG ET AL. 9

T A B L E 3 Baseline regression of the impact of a company's ESG regression result of the impact of a company's ESG rating on collabo-
rating on its overall green innovation. rative green invention patents; and the fourth column illustrates the
(1) (2) (3) regression result of the effect of a company's ESG rating on collabora-
Items F.Green_GET F.Green_GET F.Green_GET tive non-invention green patents.
ESG 1.8811** 2.0632*** 2.1152*** Initially, from the table, it is evident that the ESG coefficients in
(0.8082) (0.7810) (0.8043) Columns 1 and 3 are 2.3143 and 2.2190, respectively, while the
ESGPF 0.0504*** 0.0494*** 0.0490*** coefficients for ESGPF are 0.0458 and 0.0374, respectively. This indi-

(0.0116) (0.0115) (0.0116) cates a positive U-shaped relationship between a company's ESG rat-
ing and both independent and collaborative green inventive patents.
Age 1.6024*** 5.5271***
The smaller ESG coefficient in Column 1 compared to Column 3, and
(0.5077) (0.6679)
the larger ESGPF coefficient in Column 1 than in Column 3, validate
Size 35.1275*** 28.8244***
Hypothesis 2. Furthermore, it is observable that the ESG coefficients
(2.5800) (3.3827)
in Columns 2 and 4 are negative. While the ESG coefficient in Column
Lev 6.6265 7.1864
2 is not significant, the coefficient in Column 4 is. The ESGPF coeffi-
(11.1569) (12.7547) cients in both Columns 2 and 4 are significantly positive, thereby vali-
ROA 3.9672 2.5985 dating Hypothesis 3. Finally, this phenomenon also indicates that the
(19.3676) (20.3536) development of “good” companies' ESG ratings has a positive impact
PPE 6.5869 2.6341 on all levels of green patents.
(12.9234) (16.2242) However, for “inferior” companies, the promotional effect of
CFO 11.9829 5.6050 developing ESG ratings on the level of green patents exists only in
(13.8454) (14.1998) independent non-inventive patents, while it is inhibitory for other pat-

Top1 0.2226 0.2391 ents. This disparity suggests that “bad” companies, in the process of
improving their ESG ratings, often focus more on the balance of costs
(0.1516) (0.2089)
and benefits. Due to limited resources and significant operational
STAFF 0.4382 0.4098
pressures, these companies may be unwilling or unable to bear high
(1.1206) (1.2771)
R&D costs. Consequently, they tend to invest in non-inventive pat-
TobinQ 0.1798 0.5559
ents, which are less expensive and more practical. This strategic
(0.5721) (0.5970)
choice reflects the real challenges and constraints these companies
Year fixed YES YES YES face in enhancing their environmental protection, social responsibility,
Individual fixed YES NO YES and governance structures.
Constant 72.9872*** 690.7873*** 634.3863***
(11.8732) (57.7356) (75.2353)
Observations 10,348 10,348 10,348 4.2 | Endogeneity issue
R-squared 0.2346 0.2535 0.2554
The baseline regression advances the dependent variable by one period,
Note: The standard errors clustered at the firm level are reported in
parentheses, ***, **, and * respectively represent statistical significance at which can to some extent solve the endogeneity caused by reverse cau-
the 1%, 5%, and 10% levels. The same applies below. sality. To further address potential endogeneity in the model, we
attempt to construct instrumental variables. Following (Breuer
et al., 2018), we use industry ESG performance as an instrumental vari-
In summary, according to the analysis of Table 3, we conclude able for a company's ESG rating. Table 5 provides the second-stage
that there is a positive U-shaped relationship between a company's regression results of the two-stage instrumental variable method. As
ESG rating and green innovation. This finding deepens our under- with the baseline regression, we advance the dependent variable by
standing of the complex relationship between green innovation and a one period to avoid the lagging effect of ESG ratings on corporate
company's ESG rating and highlights the phenomenon of “inferior” green innovation. Firstly, the Kleibergen-Paap rk LM statistic,
companies potentially suppressing green innovation in the process of Kleibergen-Paap rk Wald F statistic, and Hansen J statistic in each col-
improving their ESG ratings. umn of Table 5 indicate that there are no issues of under-identification,
Table 4 presents the baseline regression results of the impact of a weak instrumental variables, or over-identification. Secondly, the magni-
company's ESG rating on individual green patents. In Table 4, we tude and significance of the ESG and ESGPF coefficients in each col-
employ four groups of regressions: the first column represents the umn of Table 5 do not differ significantly from the baseline regression,
regression result of the influence of a company's ESG rating on inde- indicating that the conclusions drawn from the baseline regression
pendent green invention patents; the second column denotes the remain correct after dealing with endogeneity issues.
regression result of the effect of a company's ESG rating on indepen- We have also incorporated the Generalized Method of Moments
dent non-invention green patents; the third column signifies the (GMM) model to estimate the impact of a company's ESG ratings on
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
10 YANG ET AL.

F I G U R E 1 The impact of companies'

ESG rating on green innovation. Source:
Authors' own elaboration. Our dataset
comprises annual observations of
individual companies spanning from 2011
to 2022, covering 1,330 companies in
China. These 27 points represent the
average ESG ratings of all companies
divided by province and the
corresponding change in green innovation
with the fluctuation in average ESG
ratings (calculated based on the column
3 model, with the specific formula being
4F.Green_GET=0.021152ESG
+0.000490ESG^2+u, where u represents
the average of residuals for each province
in the column 3 model). In our sample, the
lowest ESG rating observed is 9.9085,
while the highest is 68.9166.

green innovation. The regression results are displayed in Table 6. It is a specific interval and decrease (or increase) on the other. For such a
noteworthy that, in comparison to the baseline regression, the signs complex null hypothesis, standard testing methods may not be suit-
and significance levels of the ESG and ESGPF coefficients in each col- able. Therefore, we drew upon Lind and Mehlum's (2010) framework
umn of Table 5 remain substantially unchanged. This finding indicates based on Sasabuchi (1980) to test the U-shaped and inverted
that the conclusions drawn from the baseline regression still hold true U-shaped relationships between two variables, using the u-test com-
after addressing endogeneity using the GMM model. This further for- mand. Uttest offers a precise methodology to examine the existence
tifies our research outcomes, ensuring their robustness. of a U-shaped (or inverted U-shaped) relationship over an interval.
To enhance the robustness of our study and further substantiate Following this logic, we tested the U-shaped relationships in our base-
our findings, we implemented three measures. Firstly, we gauged a line regression, as shown in Tables A1, A2, and A3 (see Appendix). All
firm's capability for green innovation by substituting the original green models in these tables demonstrate a nonlinear relationship between
innovation metric with the number of green patent applications. Sec- a company's environmental disclosure and its external equity costs.
ondly, considering that elevating ESG (Environmental, Social, and Gov-
ernance) scores assists companies in establishing a responsible social
image and garnering public trust, there is a motivation for listed com- 5 | F U R T H E R D I S C U S SI O N : T H E CA U S E O F
panies to exaggerate their ESG performance. This could mislead rating T H E U - S H A P E D RE L A T I O N S H I P BE T W E E N
agencies and result in inaccurate scores. To address this issue, we uti- C O R P O R A T E E S G A N D GR E E N I N N O V A T I O N
lized the Huazheng ESG rating as the core explanatory variable and
reran the regression model to mitigate misunderstandings due to ESG 5.1 | The impact of various sub-items of corporate
disclosure quality issues. ESG on green innovation
Moreover, most empirical studies attempting to identify
U-shaped relationships typically introduce a nonlinear (usually qua- Firstly, corporate ESG ratings are composed of E, S, and G. Is the
dratic) term into the standard linear regression model. If this term is U-shaped relationship between corporate ESG ratings and green inno-
significant and the estimated turning point falls within the data range, vation consistent across all scores, or is it caused by a particular indi-
a U-shaped relationship can be inferred. However, Lind and Mehlum cator? Could this reflect the underlying logic of why companies
(2010) argued that this criterion might be overly lenient. The model improve their ESG ratings? To answer this, we regress E, S, and G sep-
could erroneously generate turning points and U-shaped relationships arately against green innovation, using the following model:
when the actual relationship is convex and monotonic. Testing for X X
GIi,tþ1 ¼ β0 þ β1 Xi,t þ β2 XPFi,t þ δControlsi,t þ Year t þ Individuali þ τi,t
U-shaped relationships is more intricate, as the null hypothesis t i
ð2Þ
requires the relationship to increase (or decrease) on one side of
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
YANG ET AL. 11

T A B L E 4 Baseline regression of the

(1) (2) (3) (4)
impact of a company's ESG rating on Items F.Green_GETI,NU F.Green_GETNI,NU F.Green_GETI,U F.Green_GETNI,U
individual green patents.
ESG 2.3143*** 1.3872 2.2190*** 2.7070***
(0.6361) (0.8613) (0.4868) (0.7468)
ESGPF 0.0458*** 0.0364*** 0.0374*** 0.0464***
(0.0097) (0.0127) (0.0077) (0.0113)
Age 2.5125*** 4.0623*** 1.7168*** 2.4024***
(0.4892) (0.6407) (0.3461) (0.4349)
Size 16.2455*** 21.1895*** 7.7305*** 6.6408***
(2.6993) (3.1466) (1.8033) (2.0427)
Lev 6.6887 7.8544 7.0283 1.3472
(7.7402) (11.8419) (5.5759) (7.9087)
ROA 36.3059*** 10.7156 6.8722 18.7129*
(13.9321) (20.0020) (9.3049) (10.6744)
PPE 4.7387 10.4083 1.8779 0.1503
(9.2456) (14.8934) (9.1331) (12.1030)
CFO 5.7154 4.0610 2.5695 5.1744
(10.6826) (13.3389) (6.5048) (7.8978)
Top1 0.1056 0.4069** 0.2047* 0.0245
(0.1552) (0.1926) (0.1221) (0.1421)
STAFF 0.6431 0.1729 1.1004 0.3632
(1.0036) (1.2939) (0.7143) (0.8385)
TobinQ 0.1487 0.6184 0.0039 0.3559
(0.3789) (0.5344) (0.2218) (0.2694)
Year fixed YES YES YES YES
Individual fixed YES YES YES YES
Constant 345.3180*** 461.6461*** 173.4432*** 133.4492***
(59.6682) (70.5406) (40.5678) (47.4085)
Observations 10,348 10,348 10,348 10,348
R-squared 0.1351 0.1859 0.0715 0.0802

Note: ***, **, and * respectively represent statistical significance at the 1%, 5%, and 10% levels.

TABLE 5 Regression of a company's ESG rating on green innovation levels: instrumental variable method.

(1) (2) (3) (4)

Items F.Green_GET F.Green_GETI,NU F.Green_GETI,U F.Green_GETNI,U
ESG 4.3919** 4.7390*** 4.5132*** 4.1381***
(1.9416) (1.3776) (0.9804) (1.2445)
ESGPF 0.0869*** 0.0588*** 0.0611*** 0.0720***
(0.0248) (0.0179) (0.0128) (0.0164)
Control variables YES YES YES YES
Year fixed YES YES YES YES
Individual fixed YES YES YES YES
Kleibergen-Paap rk LM 320.131 1325.209 1325.209 1325.209
Kleibergen-Paap rk Wald F statistic 240.082 3895.377 3895.377 3895.377
Hansen J statistic 0.000 0.000 0.000 0.000
Observations 10,316 10,316 10,316 10,316
R-squared 0.2524 0.1215 0.0620 0.0759

Note: ***, **, and * respectively represent statistical significance at the 1%, 5%, and 10% levels.
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
12 YANG ET AL.

TABLE 6 Regression of a company's ESG rating on green innovation levels: GMM model.

(1) (2) (3) (4)

VARIABLES F.Green_GET F.Green_GETI,NU F.Green_GETI,U F.Green_GETNI,U
ESG 10.2519*** 6.4726*** 6.5825*** 7.5681***
(2.3785) (1.8029) (1.2395) (1.4756)
ESGPF 0.1573*** 0.0813*** 0.0837*** 0.1093***
(0.0298) (0.0225) (0.0156) (0.0192)
Age 6.5583 5.0289 6.7214*** 2.0525
(4.2730) (3.3173) (2.4158) (2.8570)
Size 29.4411*** 18.9867*** 9.5059*** 7.2313***
(2.5822) (1.9341) (1.3264) (1.5588)
Lev 10.1752 13.3247** 11.6732** 3.6004
(9.5727) (6.3252) (4.5319) (5.7725)
ROA_interp 3.1302 34.6871*** 7.2370 15.7067
(16.6229) (12.0863) (8.2093) (9.5682)
PPE_interp 6.5193 2.4820 0.3671 2.1957
(11.2738) (7.8217) (5.8798) (7.2282)
CFO_interp 5.5142 6.0698 2.7595 5.1569
(12.5455) (9.8622) (6.0852) (7.4780)
Top1_interp 0.2341 0.0956 0.2118*** 0.0209
(0.1424) (0.1038) (0.0753) (0.0933)
STAFF_interp 0.5633 0.7228 1.1835** 0.2714
(0.9201) (0.7439) (0.4798) (0.5744)
TobinQ 0.4098 0.3536 0.0843 0.2942
(0.4870) (0.3166) (0.1851) (0.2316)
Year fixed YES YES YES YES
Individual fixed YES YES YES YES
Kleibergen-Paap rk LM 199.564 199.564 199.564 199.564
Kleibergen-Paap rk Wald F statistic 130.94 130.94 130.94 130.94
Hansen J statistic 0 0 0 0
Observations 10,316 10,316 10,316 10,316
R-squared 0.2338 0.1149 0.0387 0.0585

Note: ***, **, and * respectively represent statistical significance at the 1%, 5%, and 10% levels.

In equation (2), X i,t includes three indicators: E score, S score, and improve their environmental performance and thereby enhance their
G score. XPF i,t contains three indicators: the square of the E score, the green innovation capabilities.
square of the S score, and the square of the G score. Other variables On the other hand, environmental pollutants represent resource
are consistent with model (1). The regression results are shown in waste in the production process. Emphasizing environmental respon-
Tables 7, 8, and 9. sibility is consistent with sustainable development principles, guiding
The E coefficient in each column of Table 7 is not significant, companies to reduce environmental emissions, save energy, and
while the EPF coefficients are all significantly positive, indicating that improve resource use efficiency (Aras & Crowther, 2008). Therefore,
the E score has a positive impact on various green innovation patents emphasizing environmental protection will foster appropriate environ-
and does not result in a U-shaped relationship. This may be due, on mental management practices, promote the development of green
the one hand, to the fact that “green” is a fundamental concept of the innovation, and increase pollution prevention efforts.
new development paradigm, and the Chinese government has imple- In Table 8, only the Social (S) coefficient in the third column is sig-
mented various environmental regulations to strengthen ecological nificantly negative, while the coefficients in the other columns are not
civilization (Jiang et al., 2021). Under the pressure of external regula- significant. At the same time, the Social Positive Factor (SPF) coeffi-
tions and legitimacy, companies face constraints from environmental cients in all columns are significantly positive. This indicates a
regulations and social demands. As such, expected pollution control U-shaped relationship between the social score and the level of joint
costs and production costs increase, encouraging companies to innovation invention patents, but a positive impact on green
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
YANG ET AL. 13

T A B L E 7 Regression of the impact of

(1) (2) (3) (4)
E score on various green patent Items F.Green_GET F.Green_GETI,NU F.Green_GETI,NU F.Green_GETNI,U
indicators.
E 0.219 0.199 0.228 0.149
(0.245) (0.206) (0.158) (0.219)
EPF 0.0137** 0.0139*** 0.0116*** 0.0117**
(0.00550) (0.00484) (0.00399) (0.00562)
Control variables YES YES YES YES
Year fixed YES YES YES YES
Individual fixed YES YES YES YES
Constant 660.9*** 386.8*** 199.2*** 165.6***
(73.86) (59.53) (41.47) (45.84)
Observations 10,348 10,348 10,348 10,348
R-squared 0.255 0.129 0.066 0.074

Note: ***, **, and *respectively represent statistical significance at the 1%, 5%, and 10% levels.

T A B L E 8 Regression of the impact of

(1) (2) (3) (4)
S score on various green patent Items F.Green_GET F.Green_GETI,NU F.Green_GETI,NU F.Green_GETNI,U
indicators.
S 0.285 0.874* 0.975*** 1.001*
(0.649) (0.503) (0.347) (0.523)
SPF 0.0336** 0.0464*** 0.0316*** 0.0416***
(0.0163) (0.0139) (0.00968) (0.0138)
Control variables YES YES YES YES
Year fixed YES YES YES YES
Individual fixed YES YES YES YES
Constant 692.3*** 390.8*** 217.6*** 178.1***
(74.69) (59.39) (40.74) (45.49)
Observations 10,348 10,348 10,348 10,348
R-squared 0.250 0.131 0.063 0.073

Note: ***, **, and * respectively represent statistical significance at the 1%, 5%, and 10% levels.

T A B L E 9 Regression of the impact of

(1) (3) (6) (7)
G score on various green patent Items F.Green_GET F.Green_GETI,NU F.Green_GETI,NU F.Green_GETNI,U
indicators.
G 1.529** 1.755*** 1.406*** 1.718***
(0.733) (0.626) (0.430) (0.567)
GPF 0.0135** 0.0165*** 0.0122*** 0.0143***
(0.00631) (0.00545) (0.00383) (0.00480)
Control variables YES YES YES YES
Year fixed YES YES YES YES
Individual fixed YES YES YES YES
Constant 680.6*** 364.3*** 178.2*** 142.9***
(76.96) (62.10) (39.74) (45.41)
Observations 10,348 10,348 10,348 10,348
R-squared 0.247 0.126 0.062 0.070

Note: ***, **, and * respectively represent statistical significance at the 1%, 5%, and 10% levels.

innovation in other cases. This may be because, in joint innovation, innovation. They may focus more on short-term benefits and tend to
the social score may have a suppressing effect on “bad” companies. obtain more resources or technologies through cooperation rather
For example, these companies may have different motives in joint than truly commit to a common innovation goal. These differences in
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
14 YANG ET AL.

motives can lead to misalignment of goals among partners and thus 2.7806, respectively, indicating that the change in DESG is mainly
affect the progress of joint innovation projects. Therefore, in this case, caused by DE and DG. In summary, when below the inflection point,
an increase in the social score may suppress the level of joint green companies mainly improve ESG ratings by enhancing G scores; when
invention patents. above the inflection point, it is mainly due to E and G scores, and the
However, in other cases, positive social performance may encour- contribution of E score is only 0.2453 less than the G score, which
age companies to invest more resources in environmental innovation, well verifies that “bad” companies improve ESG ratings primarily by
enhance the level of green innovation, and thus promote a positive improving the level of corporate governance.
relationship between environmental score and green innovation. In
summary, these findings emphasize the complex interactions between
different types of companies and motives in joint innovation and the 5.2 | Heterogeneity analysis of corporate ESG on
important role of social scoring in shaping corporate innovation green innovation
behavior.
In Table 9, the coefficients for G (Governance) in each column are To further explore the rationality of the “bad” company logic, we also
significantly negative, while the coefficients for GPF are significantly use the return on assets to represent the profitability of the company,
positive. This indicates that the impact of improving corporate gover- and the debt ratio to represent the operating risk of the company for
nance scores on the level of green innovation presents a U-shaped heterogeneity analysis. Specifically, the median return on assets
relationship. This phenomenon may be due to the characteristics of within the sample is used for division; companies below the median
green innovation, such as long cycles, large investments, significant are defined as the low-profitability group and those above the
externalities, and high risks. Faced with poor business conditions, median are defined as the high-profitability group. Then, the ESG rat-
“bad” companies may prefer to prioritize resources to improve corpo- ing is used to regress on the total level of green innovation patents;
rate governance levels to respond to internal and external pressures the median debt ratio within the sample is used for division, compa-
and challenges. This leads to relatively fewer resources being allo- nies below the median are defined as the low operational risk group,
cated to green innovation, a field that requires a longer time for and those above the median are defined as the high operational risk
returns. Therefore, to some extent, the improvement in governance group. Then, the ESG rating is used to regress the total level of green
scores suppresses these companies' enthusiasm for green innovation. innovation patents. The regression results are shown in Table 10.
In summary, according to the above conclusions, the U-shaped In Table 11, the ESG coefficients in columns 1 and 4 are signifi-
relationship between ESG ratings and the level of green innovation is cantly negative, and ESGPF is significantly positive, while the ESG
mainly due to the G score. We infer that “bad” companies improve coefficients in columns 2 and 3 are not significantly negative. This
ESG ratings mainly by improving the corporate governance score. To indicates that the U-shaped relationship between ESG ratings and
verify this inference, we differentiate ESG, E, S, and G, and conduct a green innovation only exists in the low-profit group and high-
descriptive analysis based on the inflection point (21.5917) of the operational risk group, which suggests that the U-shaped relationship
U-shaped relationship between ESG ratings and the impact on total between ESG ratings and green innovation is indeed caused by “bad”
green innovation patents, as shown in Table 10. companies.
From Table 10, it can be seen that when ESG < 21.5917, the
average values of DESG, DE, DS, and DG are 0.3035, 0.1149,
0.6124, and 1.5764, respectively, indicating that the change in 5.3 | Analysis of moderating mechanisms
DESG is mainly caused by DG. When ESG > =21.5917, the average
values of DESG, DE, DS, and DG are 2.3720, 2.5353, 0.7438, and We delve into the challenges faced by companies with low ESG rat-
ings in enhancing their ratings, particularly focusing on how to miti-
gate, or even reverse, the adverse effects on green innovation output
TABLE 10 Descriptive analysis of DESG, DE, DS, and DG.
while improving their ESG ratings. It posits that government subsidies
Items Obs Mean Std. dev. Min Max could be pivotal in addressing this challenge. Firstly, subsidies provide
ESG < 21.5917 the crucial financial support needed for firms to engage in green inno-
DESG 1718 0.3035 2.7403 13.3890 11.5702 vation and transformation (Hu et al., 2021). For those companies
DE 1701 0.1149 2.4698 29.8701 14.7992 investing in clean technology or improving production processes to
DS 1718 0.6124 3.1335 21.0526 19.2982 reduce their carbon footprint, government fiscal assistance can signifi-
DG 1718 1.5764 6.8703 39.8555 25.4666 cantly alleviate the burden of these initial investments. Secondly,

ESG > =21.5917 given that innovation often comes with high risk, government subsi-
dies can act as a risk-sharing mechanism, encouraging firms to venture
DESG 7,272 2.3720 4.0203 11.2665 32.4415
into the development of green technologies that have yet to be com-
DE 7,270 2.5353 7.0990 25.9438 61.1598
mercialized (Mateut, 2018). Additionally, government subsidies send a
DS 7,272 0.7438 4.0340 26.7231 30.8646
clear signal to the market in support of the green economic transition,
DG 7,272 2.7806 8.5830 42.2336 54.8766
which may motivate companies to participate more actively in green
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
YANG ET AL. 15

TABLE 11 Heterogeneity analysis of corporate ESG on green innovation: profitability and operational risks.

(1) (2) (3) (4)

Low-profit group High-profit group Low-operational risk group High-operational risk group
Items F.Green_GET F.Green_GET F.Green_GET F.Green_GET
ESG 3.4524*** 1.1619 0.4227 2.6662**
(1.2561) (1.0032) (0.9845) (1.1534)
ESGPF 0.0714*** 0.0299** 0.0178 0.0563***
(0.0187) (0.0141) (0.0145) (0.0160)
Control variables YES YES YES YES
Year fixed YES YES YES YES
Individual fixed YES YES YES YES
Constant 843.5876*** 596.6224*** 491.5497*** 789.0920***
(137.4215) (97.3665) (92.0256) (121.9394)
Observations 5,174 5,174 5,174 5,174
R-squared 0.2376 0.2625 0.1662 0.3107

Note: ***, **, and * respectively represent statistical significance at the 1%, 5%, and 10% levels.

innovation. Lastly, considering that green investments often require a GreenGET i,tþ1 ¼ α0 þ α1 ESGi,t þ GSi,t þ α2 ESGi,t  GSi,t ð3Þ

long-term cycle, high costs, and may not yield significant returns in þ α3 ESGPFi,t þ α2 ESGPFi,t  GSi,t
X X
the short term, subsidies can help firms alleviate the cost pressures of þ γControlsi,t þ t
Year t þ i
Individuali þ εi,t
green innovation and maintain a competitive edge in both current and
future markets. GreenGET i,tþ1 ¼ α0 þ α1 ESGi,t þ ECLi,t þ α2 ESGi,t  ECLi,t ð4Þ
Moreover, the paper also suggests that improving corporate man- þ α3 ESGPFi,t þ α2 ESGPFi,t  ECLi,t
agement levels is another key strategy for companies with low ESG X X
þ γControlsi,t þ t
Year t þ i
Individuali þ εi,t
ratings to tackle these challenges. Green innovation often takes time
to yield economic benefits and requires substantial initial investment.
For companies already facing financial difficulties, such investments In Equations (3)–(4), GSi,t represents government subsidies, while
may exacerbate existing financial pressures. Therefore, strong man- ESGi,t  GSi,t denotes the interaction term between ESG ratings and
agement capabilities are crucial for ensuring the effective execution government subsidies. ESGPFi,t  GSi,t signifies the quadratic term of
of projects and their alignment with the company's overall strategy. ESG ratings interacting with government subsidies. Other variables
For companies with low ESG ratings, enhancing management levels remain consistent with Equation (1). ECLi,t symbolizes executive com-
could be key to mitigating the adverse effects of low ESG ratings. pensation levels, ESGi,t  ECLi,t is the interaction term between ESG
Effective management can improve the efficiency of resource alloca- ratings and executive compensation levels, and ESGPFi,t  ECli,t repre-
tion, ensuring optimal use of limited resources, especially during times sents the quadratic interaction of ESG ratings and executive compen-
of resource scarcity. Furthermore, better management helps compa- sation levels.
nies more adeptly identify and seize opportunities for green innova- The regression results are presented in Table 12. Observing Col-
tion, even under conditions of limited resources. umn 1, the positive coefficient of the interaction between ESG and
In summary, through government subsidies and improved man- GS (government subsidies) suggests that for companies with lower
agement efficiency, companies with low ESG ratings can reduce ESG ratings, government subsidies can effectively mitigate the
the negative impact on green innovation output while enhancing adverse impact on green innovation associated with improving ESG
their ESG ratings, and potentially even reverse this trend, thereby ratings. Conversely, the negative coefficient for the interaction
achieving sustainable development goals. These strategies not only between ESGPF (ESG performance) and GS implies that for compa-
aid in the transformation of the businesses themselves but also nies with higher ESG ratings, government subsidies might diminish the
support the achievement of broader environmental and social positive impact on green innovation when improving ESG ratings. This
objectives. phenomenon may be attributable to the fact that companies with
To this end, we use the ratio of government grants received to lower ESG ratings face substantial financial pressures and cannot allo-
total assets as a measure of government subsidies and the logarithmic cate significant funds for prolonged green innovation research and
value of the average executive compensation income (the total remu- development. Through government subsidies, these enterprises can
neration of directors, supervisors, and senior executives divided by access additional funds, aiding them in allocating resources for green
their number) to analyze the moderating effects. The formula is as innovation research and development, thereby ensuring a competitive
follows: edge in the future. Companies with higher ESG ratings, which are
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
16 YANG ET AL.

T A B L E 1 2 Moderating mechanisms of government subsidies and firms, often with limited funds, may be under considerable financial
executive compensation levels. strain under hefty investments in green innovation. The increase in
(1) (2) government subsidies, especially when reaching or surpassing the crit-
Items F.Green_GET F.Green_GET ical threshold of 0.016, provides essential financial backing for these
ESG 2.7102*** 21.9659** companies to undertake the necessary initial investments in green
(0.9033) (9.6100) innovation. Secondly, the escalation in government subsidies consid-
ESGPF 0.0626*** 0.3708** erably reduces the risks these companies encounter in the process of

(0.0137) (0.1467) green innovation. Given that green innovation projects typically
involve high risks and extended periods for investment returns, the
GS 1,925.7833*
injection of government funds helps enterprises undertake these risks
(1,050.0993)
with more confidence and enhances their ability to make long-term
ESG*GS 193.1071**
investments. Furthermore, government subsidies also ignite internal
(79.1181)
enthusiasm and motivation for green innovation within the company.
ESGPF*GS 3.9072***
Realizing that government support can ease financial pressures, the
(1.4153) company's management and staff might engage more actively in
ECL 22.4681* exploring and implementing green innovation projects, thus propelling
(11.9602) the company towards sustainable development.
ESG*ECL 1.4569** In addition, we also elucidate the relationship between the inflec-
(0.7118) tion point of ESG ratings and government subsidies as shown in
ESGPF*ECL 0.0234** Table 13. It is evident that as government subsidies increase from
(0.0106) 0.001 to 0.00016, the inflection value continually decreases. This sug-

Control variables YES YES gests that in the positive U-shaped relationship between ESG and
green innovation, as government subsidies rise, more and more com-
Year fixed YES YES
panies on the right side of the inflection point demonstrate a positive
Individual fixed YES YES
relationship between ESG ratings and green innovation. When gov-
Constant 645.6486*** 342.2991*
ernment subsidies reach 0.013, no company has an ESG rating below
(75.7734) (175.0466)
the inflection value (the range of corporate ESG ratings is between
Observations 10,322 10,271
0.9085 and 68.9166). When government subsidies exceed the tipping
R-squared 0.2575 0.2556 point, the relationship between corporate ESG ratings and green inno-
Note: ***, **, and * respectively represent statistical significance at the 1%, vation turns into a U-shape, with the ESG rating inflection point grad-
5%, and 10% levels. ually decreasing from 74.132 to 36.95992. This indicates that with
the increase in government subsidies, the number of companies on
generally in good operational health with ample cash flow, possess the left side of the inflection point is continuously decreasing, and
sufficient motivation and funds for green innovation research and fewer and fewer companies show a positive relationship between
development. Government subsidies in these cases may lead to a ESG ratings and green innovation. Therefore, we posit that for compa-
more “comfortable” position, potentially causing them to blindly nies with lower ESG ratings, the government should intensify subsidy
expand their scale of operations, reducing investment in green innova- efforts.3 For companies with higher ESG ratings, the government
tion, and thus impeding the promotive role of ESG ratings on green needs to appropriately reduce subsidy intensity.
innovation. Looking at Column 2, the positive coefficient for the interaction
Therefore, how much government subsidy is necessary to assist between ESG and ECl (executive compensation level) indicates that
companies with lower ESG ratings in enhancing their ESG ratings for companies with lower ESG ratings, executive compensation levels
while simultaneously reducing the unfavorable impact on their green can effectively alleviate the adverse impact on green innovation asso-
innovation output? Is it possible for government subsidies to reverse ciated with increasing ESG ratings. We argue that for companies with
this adverse effect? This study, referencing Haans et al. (2016), calcu- lower ESG ratings, raising executive compensation levels can effec-
lates the inflection point of government subsidies as 0.0160 tively improve management standards, optimizing management strate-
(0.0626/3.9072), indicating that when government subsidies reach gies and enhancing management efficiency. This helps better mobilize
0.0160, the relationship between green innovation and ESG perfor- resources and ignite the potential for green innovation, thereby sup-
mance shifts from a positive U-shape to an inverted U-shape. This is porting green innovation activities while enhancing ESG ratings.
crucial, as it means when government subsidies reach 0.016, compa-
nies with lower ESG ratings can improve their ESG ratings without
3
adversely affecting green innovation. The likely reasons for this Upon examining the data sample, it was found that among the samples with ESG ratings
below the inflection point (21.59173), there are 2,348 samples. Of these, 75% receive
include, firstly, significant government financial support alleviating the
government subsidies less than 0.0056778. This indicates that the majority of companies
cost pressures these companies face in enhancing ESG ratings. These with lower ESG ratings receive minimal government assistance.
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
YANG ET AL. 17

TABLE 13 Inflection points of government subsidies and executive compensation levels.

Government subsidy Government subsidy inflection Management level Executive compensation level inflection
gradient point gradient point
0.001 21.45748 9.5 27.37315
0.002 21.22522 10 27.0527
0.003 20.95726 10.5 26.67224
0.004 20.64469 11 26.21318
0.005 20.27534 11.5 25.64834
0.006 19.83221 12 24.93643
0.007 19.29073 12.5 24.01138
0.008 18.61407 13 22.76064
0.009 17.7444 13.5 20.97545
0.01 16.5854 14 18.22017
0.011 14.96386 14.5 13.40908
0.012 12.53387 14.6 11.98136
0.013 8.490085 14.7 10.30323
0.014 0.4256412 14.8 8.302435
0.015 23.58417 14.9 5.876072
0.016 4220.961 15 2.87214
0.017 74.13209 15.5 38.6340
0.018 49.27896 16 179.6618
0.019 41.05836 16.5 67.08643
0.02 36.95992 17 51.57882

The negative coefficient for the interaction between ESGPF (ESG appropriately reduce the compensation of management personnel or
performance) and ECL suggests that for companies with higher ESG establish measures to reduce their shortsighted behaviors.
ratings, executive compensation levels might reduce the positive
impact on green innovation when improving ESG ratings. we contend
that in companies with higher ESG ratings, which are inherently “good 6 | CONCLU SION AND P OLICY
companies” with solid operational health, there is no urgent pressure RECOMMENDATIONS
on the management to improve company conditions. This may lead to
highly compensated executives becoming more shortsighted, lacking In this study, we think that for “good” companies, which typically
strong motivation for green innovation, and even pursuing short-term boast commendable operational performance and relatively stable
gains, thereby reducing the promotive role of ESG ratings on green financial conditions, green innovation represents a potential growth
innovation. area. Developing ESG (Environmental, Social, and Governance) scores
Through calculation, it is determined that the tipping point for emerge as an efficacious means to foster green innovation, yielding
executive compensation levels is 15.84 (at this level, the relationship positive economic and sustainable development returns. Conversely,
between green innovation and ESG performance shifts from a positive for “bad” companies, the pivotal task lies in stabilizing their opera-
U-shape to an inverted U-shape). However, examining the sample tional conditions, potentially necessitating investments in fixed assets
data reveals that 99% of the companies have executive compensation and conventional innovations to achieve a positive Net Present Value
levels below 15.84. Thus, adjusting executive compensation levels can (NPV). Hence, these entities may prefer to allocate resources to these
achieve the model's tipping point. Moreover, it is observed that as domains, thereby constraining their investments and efforts in green
executive compensation levels increase from 9.5 to 15.5, the inflec- innovation. Building on this premise, we explore how a company's
tion value continually decreases. This implies that with the enhance- ESG rating influences its green innovation. Additionally, we delve into
ment of management standards, more and more companies on the the measures that enterprises and governments should adopt to mini-
right side of the inflection point demonstrate a positive relationship mize the adverse impact on green innovation while enhancing the
between ESG ratings and green innovation. Therefore, the paper sug- ESG ratings of companies with lower ratings. Through this process,
gests that companies with lower ESG ratings should recruit more out- our paper comprehensively examines the impact of corporate ESG
standing managers to improve corporate management capabilities. ratings on green innovation and their corresponding response strate-
For companies with higher ESG ratings, it is necessary to gies. Our research is empirically supported by data from 1,330
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
18 YANG ET AL.

Chinese A-share companies listed on the Shanghai and Shenzhen relationship. This suggests that subsidies exceeding 0.016 enable
stock exchanges from 2011 to 2022. The empirical findings of this “bad” companies to increase their investment in green innovation dur-
study offer valuable insights into public policy, corporate ESG strate- ing the process of enhancing their scores, thereby elevating the level
gies, and their financial practices. of green innovation. For such companies, government subsidies can
Firstly, we demonstrate a positive U-shaped relationship between significantly alleviate financial pressures, providing the necessary
a company's ESG rating and its green innovation. This is primarily funding for green patent research and development, and consequently
attributed to the positive U-shaped relationship between corporate mitigating the adverse impact of ESG ratings on green innovation
governance scores and green innovation. Our empirical evidence sug- capabilities. Simultaneously, elevating corporate management stan-
gests that “bad” companies are more inclined to improve their corpo- dards helps companies improve operational conditions, enabling them
rate governance scores to enhance their overall ESG ratings. Faced to allocate a portion of their funds to green innovation investment.
with environmental regulatory pressures, these companies tend to This development strategy is crucial for fostering green innovation.
purchase end-of-pipe treatment equipment rather than invest in green However, for “good” companies, already possessing sound opera-
innovation research and development. However, once surpassing the tional status and ample cash flow, additional government subsidies
inflection point, “good” companies, in the process of elevating their may lead to excessive operational comfort. This could result in compa-
ESG ratings, regard green innovation as a crucial growth vector, nies blindly expanding their scale of operations, reducing investment
heavily investing in green innovation research and development, in green innovation, thereby hindering the positive influence of ESG
thereby positively influencing green innovation. By visualizing the dis- ratings on green innovation. Additionally, for the management of
tribution of our sample provinces around this U-shaped curve, we these companies, the lack of pressure to improve company conditions
observe that most sample companies are situated to the right of this may lead to shortsightedness, a lack of motivation for green innova-
turning point. These companies, in the process of elevating their ESG tion, or even a pursuit of short-term benefits, thus diminishing the
ratings, allocate more funds for green innovation research and devel- promotive effect of ESG ratings on green innovation.
opment, consequently fostering green innovation. For the majority of Chinese enterprises face immense pressure to enhance their envi-
these sample companies, the benefits of green innovation surpass its ronmental protection, social responsibility, and internal governance
costs. performance. Our study finds that “bad” companies are more inclined
Secondly, we also examine the impact of corporate ESG ratings to improve corporate governance to enhance operational conditions,
on various types of green patents. A positive “U” shaped relationship which may adversely affect green innovation, while “good” companies
exists between corporate ESG ratings and both independent and col- can foster green innovation by elevating their ESG ratings. Therefore,
laborative inventive green innovations. For inventive green innova- the paper posits that for “bad” companies, priority should be given to
tions, “bad” companies can mitigate the negative impacts of ESG improving corporate governance structures to elevate their ESG rat-
development on green inventive innovations through collaboration; ings. This not only helps in enhancing overall operational efficiency
for non-inventive green innovations, these companies can realize the but is also a key step in transitioning into “good” companies and
positive effects of ESG ratings on green innovation through indepen- thereby enhancing green innovation capabilities. Furthermore, when
dent research and development. Our findings indicate that companies, considering compliance with environmental regulations, “bad” compa-
in the process of enhancing their ESG ratings, make appropriate stra- nies should balance short-term adaptations with long-term sustainable
tegic choices for green innovation based on their specific conditions development strategies, finding an appropriate equilibrium between
and needs. internal research and development and external technological acquisi-
Lastly, by differentiating between profitability and operational tions. This ensures compliance with environmental regulations while
risks, we discover that the positive “U” shaped relationship between a laying a solid foundation for the company's future development.
company's ESG rating and green innovation only exists in groups with Regarding investment strategies for green innovation, “bad”
low profitability and high operational risks. This indicates that compa- enterprises might lean towards developing independent, non-
nies with lower ESG ratings are characterized by lower profitability inventive green innovation patents. Such a strategy allows for control-
and higher operational risks. It is these risks that necessitate “bad” ling costs while meeting current green requirements. Non-inventive
companies to focus their resources on strengthening corporate gover- green innovations usually involve lower research and development
nance, thereby hindering the continuous allocation of resources to costs and risks, enabling even resource-limited companies to make
green innovation, which typically involves long investment and return progress in the green technology sector. By focusing on such innova-
cycles and high failure risks. tions, “bad” companies can effectively balance their financial con-
Additionally, we delve deeply into the impact of government sub- straints with environmental responsibilities, while actively responding
sidies and corporate executive compensation levels on the relation- to the growing demand in the green market. Lastly, companies should
ship between a company's ESG (Environmental, Social, and enhance the management level of their personnel. Introducing man-
Governance) score and green innovation. A pivotal discovery is that agers with a strong ESG consciousness and a background in green
when government subsidies reach 0.016, the positive U-shaped rela- innovation, along with training the existing management in ESG and
tionship between a company's ESG rating and green innovation green innovation, can improve their professional skills and awareness.
undergoes a reversal, transforming into an inverted U-shaped This not only helps the company boost profitability and reduce
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
YANG ET AL. 19

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APPENDIX A

T A B L E A 1 Robustness test:
(1) (2) (3) (4)
replacing the dependent variable.
Items F.Green_APP F.Green_APPI,NU F.Green_APPI,NU F.Green_APPNI,U
ESG 1.5975*** 1.7137*** 2.2842*** 2.0803***
(0.5651) (0.5138) (0.3681) (0.3264)
ESGPF 0.0391*** 0.0390*** 0.0440*** 0.0366***
(0.0076) (0.0069) (0.0050) (0.0044)
Control variables YES YES YES YES
Year fixed YES YES YES YES
Individual fixed YES YES YES YES
Constant 670.0991*** 502.7734*** 217.0831*** 111.8795***
(46.8364) (42.5866) (30.5120) (27.0532)
Observations 10,348 10,348 10,348 10,348
R-squared 0.2298 0.1672 0.0946 0.0593

Note: ***, **, and * respectively represent statistical significance at the 1%, 5%, and 10% levels.

T A B L E A 2 Robustness test:
(1) (2) (3) (4)
replacing the core explanatory variable. Items F.Green_GET F.Green_GETI,NU F.Green_GETI,NU F.Green_GETNI,U
HZesg 5.7717*** 5.3533*** 2.9425*** 4.3734***
(1.5793) (1.1025) (0.7603) (0.9777)
HZesg^2 1.4132*** 1.0399*** 0.5547*** 0.8083***
(0.2611) (0.1874) (0.1319) (0.1705)
Control variables YES YES YES YES
Year fixed YES YES YES YES
Individual fixed YES YES YES YES
Constant 620.4776*** 295.7620*** 105.7735*** 124.9496***
(38.8567) (27.4609) (16.2323) (18.4023)
Observations 33,107 33,107 33,107 33,107
R-squared 0.2209 0.0969 0.0416 0.0487

Note: ***, **, and * respectively represent statistical significance at the 1%, 5%, and 10% levels.
 10990836, 0, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3692 by Nat Prov Indonesia, Wiley Online Library on [10/05/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
22 YANG ET AL.

TABLE A3 Robustness test: U-shape test.

(1) (2) (3) (4)

Items F.Green_GET F.Green_GETI,NU F.Green_GETI,NU F.Green_GETNI,U
ESG 2.1152*** 2.3143*** 2.2190*** 2.7070***
(0.8043) (0.6361) (0.4868) (0.7468)
ESGPF 0.0490*** 0.0458*** 0.0374*** 0.0464***
(0.0116) (0.0097) (0.0077) (0.0113)
Control variables YES YES YES YES
Year fixed YES YES YES YES
Individual fixed YES YES YES YES
Constant 634.3863*** 345.3180*** 173.4432*** 133.4492***
(75.2353) (59.6682) (40.5678) (47.4085)
Observations 10,348 10,348 10,348 10,348
R-squared 0.2554 0.1351 0.0715 0.0802
Inflection point 21.5917 25.28898 29.70524 29.1549
Proportion of samples on the left of the inflection point 22.8% 36.2% 63.6% 61.3%
Utest (P-value) 0.0259 0.00106 0.0000 0.0004

Note: ***, **, and * respectively represent statistical significance at the 1%, 5%, and 10% levels.