Can digital transformation promote firms' sustainable development? Evidence based on ESG performance

Zhongsheng Zhou, Zhichao Yuan and Chao He

International Review of Financial Analysis, 2025, vol. 105, issue C

Abstract: Digita transformation, an important engine of high quality development, can bring growth opportunities to firms, but can it also improve their environmental, social, and governance (ESG) performance and power their sustainable development? Combining digital development and firms' ESG performance, we empirically examine the impact of digital transformation on ESG performance using a sample of Chinese A-share firms listed on the Shanghai and Shenzhen Stock Exchanges. The results show that digital transformation can strengthen firms' ESG performance and promote sustainable growth. A mechanism test shows that digital transformation enhances firms' ESG performance through four main mechanisms: improving capacity utilization, strengthening green innovation, enhancing internal governance, and easing financing constraints. The cross-sectional test shows that the digital transformation behavior of low-pollution firms and high-tech firms have a more significant positive effect on ESG performance than is seen for other firms. The additional analysis shows that digital transformation is more conducive to improving ESG performance for firms in a weak institutional environment, firms with low levels of industry competition, and firms with low levels of green finance development. These findings enrich the analysis of the economic consequences of digital transformation and the factors influencing ESG performance at the micro level and also have theoretical and practical implications.

Keywords: Digital transformation; ESG; Textual analysis; Sustainable development (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:105:y:2025:i:c:s1057521925005216

DOI: 10.1016/j.irfa.2025.104434

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