Digitalization transformation and ESG performance: Evidence from China

Abstract The mechanisms underlying the relationship between firms' digitalization transformation and environmental, social, and governance (ESG) are underexplored. Using a sample of Chinese listed firms from 2011 to 2020, this research explores the mechanisms whereby digitalization affects firms' ESG performance. We found: (i) digitalization transformation can effectively promote firms' ESG performance; (ii) digital transformation promotes firms' ESG performance by enhancing internal control and green innovation; and (iii) the positive effects between digital transformation and ESG performance are more pronounced in non‐state‐owned‐enterprises (non‐SOEs) and firms of the manufacturing industry, and hi‐tech firms, as well as firms with a higher ratio of independent directors and higher analyst coverage. (iv) The government's supportive attitude towards industrial policy has a positive moderating effect on the impact of digital transformation on ESG performance, and the degree of marketization in the region where the firm is located has a negative moderating effect on the relationship between digital transformation and ESG performance. Our research deepens the understanding of the nuanced mechanism underlying the positive relationship between firms' digital transformation and their ESG performance.