The Relation Between ESG Performance, Financing Constraints, and Innovation Output: Empirical Evidence from Chinese Listed Companies

Abstract

As environmental, social, and governance (ESG) considerations increasingly shape corporate strategy, the link between ESG and innovation has drawn growing attention. Focusing on Chinese A-share listed firms, this paper examines whether ESG performance promotes innovation by easing financing constraints. Using a balanced panel comprising around 5,000 firms and 41,649 firm-year observations from 2012 to 2024, this report estimates fixed-effects models, measure innovation by patent applications (log) and R&D investment, capture financing constraints with the SA index, and implement mediation and robustness tests. ESG data are drawn from Huazheng ESG ratings. The results show that, first, ESG performance is positively and significantly associated with innovation output. Second, financing constraints partially mediate this relationship: stronger ESG practices alleviate external financing pressure, thereby fostering R&D and patenting. Third, hetero-genetic analyses indicate stronger effects among non-state-owned firms and technology-intensive industries. These findings suggest that firms should align ESG initiatives with innovation strategies to reduce financing frictions, while policymakers can strengthen green finance and disclosure regimes to channel capital toward firms with superior ESG and innovation potential.