Sustainability as a Catalyst for Growth: ESG, Innovation, and Financial Outcomes in Emerging Markets

Abstract

This study explores the impact and underlying mechanism of Environmental, Social, and Governance (ESG) practices on the financial performance of Chinese listed companies, with a specific focus on the mediating role of corporate innovation. Drawing on stakeholder theory, innovation theory, and the concept of shared value, the research employs panel data from 2011 to 2020 covering 1,380 A-share firms. A series of fixed-effects regressions, mediation models, and instrumental variable tests are conducted to ensure robustness and address endogeneity concerns. The results reveal that ESG governance positively influences firm financial performance, but primarily through its effect on innovation rather than through direct channels. Firms with stronger ESG performance demonstrate higher R\&D intensity and investment in innovation-related personnel, which in turn lead to improved financial outcomes. Mediation analysis confirms that corporate innovation acts as a significant conduit through which ESG practices translate into long-term firm value. Additional findings highlight the role of transparency and risk management as amplifying factors, while excessive agency costs and leverage appear to diminish performance gains. This study contributes to ESG literature by clarifying the internal pathways connecting non-financial governance practices with financial metrics and by contextualizing the ESG–innovation–performance nexus in an emerging market setting. The findings offer strategic implications for corporate managers, investors, and policymakers, emphasizing ESG as a source of innovation-driven competitive advantage. Overall, the research provides a theoretical and empirical foundation for advancing ESG-integrated innovation strategies that foster sustainable financial success.