Tax burden and enterprises' ESG performance

Xintong Fu and Xiangwei Zhang

International Review of Financial Analysis, 2025, vol. 103, issue C

Abstract: The ESG framework, which integrates economic development with environmental conservation, is essential for climate action. By embedding environmental, social, and governance priorities, firms can implement the UN Sustainable Development Goals (SDGs) while shifting towards low-carbon operations. This study examines longitudinal data (2011–2023) to determine causal relationships between fiscal obligations and ESG outcomes, demonstrating that tax pressures positively affect corporate sustainability performance through two mechanisms: 1) enhancing innovation through increased R&D investment and 2) alleviating capital allocation constraints that typically impede green initiatives.Sectoral and organizational diversity also influences this relationship. State-owned enterprises exhibit heightened ESG responsiveness to taxation, motivated by their dual obligation to align public policy goals with economic sustainability. Pollution-intensive businesses demonstrate increased responsiveness to fiscal stimulus as adopting ESG practices becomes essential for regulatory compliance and market competitiveness. These findings reframe taxation as an institutional mechanism instead of a financial limitation, prompting advances in environmental governance.The research enhances sustainability scholarship by recognizing fiscal policy as a neglected factor in advancing ESG. It provides regulators with evidence-based ways to enhance tax incentives that promote decarbonization, especially in state-influenced and high-emission sectors. The results underscore tax planning as a dual-purpose tool for corporate executives, harmonizing fiscal efficiency with integrating sustainability into fundamental business models.

Keywords: Tax burden; ESG; Financial constraints (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:103:y:2025:i:c:s1057521925003102

DOI: 10.1016/j.irfa.2025.104223

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