Can Innovation Improve Corporate ESG Performance? The Moderating Effect of Internal and External Incentives

Abstract

ESG (Environmental, Social, and Governance) performance is an essential indicator for measuring the sustainability of corporations. It has received increased attention from capital market participants after the proposal of the ‘dual carbon’ goal. Innovation is a necessary skill for corporations to compete in the market. Therefore, this study investigates the impact of innovation on the ESG performance of corporations based on the dual incentive perspective of government subsidies and equity incentives. Using data of China’s A-share main board listed corporations from 2017 to 2022, OLS (Ordinary Least Squares) models are constructed to conduct empirical research. The results show that enhanced innovation can significantly improve corporate ESG performance. This paper also conducts other tests to ensure the robustness of the findings and address potential endogeneity issues. Further analysis shows that both using government subsidies as external incentives and using equity incentives as internal incentives can positively moderate the above findings. Heterogeneity analyses discover that government subsidies granted to asset-advantaged corporations have a more substantial moderating effect than those granted to asset-weakened corporations; equity incentives granted to core technical staff have a more substantial moderating effect than those granted to executives. The concept that innovation with dual incentives can enhance corporate ESG performance can aid in developing programs to improve their ESG performance and generate novel ideas for high-quality, sustainable development.