Does environmental decentralization promote corporate ESG performance? Evidence from China

Abstract

This paper aims to comprehensively examine the impact of China's environmental decentralization on corporate environmental, social, and governance (ESG) performance and investigate the underlying mechanisms. We analyze data from Chinese listed firms spanning from 2010 to 2020. The empirical findings demonstrate that: Firstly, environmental decentralization significantly inhibits corporate ESG performance. Secondly, fiscal decentralization acts as a moderating factor whereby an increase in its level strengthens the inhibitory effect of environmental decentralization on corporate ESG performance. Thirdly, heterogeneity analysis reveals that the impact of environmental decentralization varies across different types of firms in terms of their ESG performance. Privately-owned, high-polluting, and high-tech companies are particularly inclined to reduce their ESG performance with increasing levels of environmental decentralization. Finally, our mechanism analysis indicates that environmental decentralization curtails ESG practices by exacerbating financing constraints for firms and deregulating ecological environments. These conclusions remain robust after addressing potential endogeneity issues and conducting various sensitivity tests. These findings offer valuable insights for policymakers to promote sustainable economic development.