1. Introduction
In today’s world, multiple factors such as COVID-19, conflicts, trade frictions, and economic downturn are intertwined. The business environment is significantly more uncertain, and the sustainable development of firms faces severe challenges. Firms should enhance their financial flexibility to cope with increasingly uncertain environments, prevent adverse impacts, and realize sustainable development. Thus, while preventing risks, firms should keep their financial decisions forward-facing and flexible, accurately identify and nimbly grasp the fleeting growth opportunities in uncertain environments, and adjust their business strategies.
Financial flexibility is a systematic, comprehensive ability to actively adapt to environmental changes, deal with system uncertainties, integrate financial resources, and optimize financial behavior decisions [
1,
2]. When encountering major adverse shocks, firms with sufficient financial flexibility show three advantages: (1) They can invoke and raise funds at a low cost to quickly adjust to the capital structure and avoid financial distress [
3]; (2) reduce the negative impact of environmental uncertainty, adapt to the external dynamic environment, improve innovation efficiency, and enhance core competitive advantages [
4]; and (3) reserve sufficient resources and capabilities, enhance development potential, proactively create conditions, seize development opportunities, and achieve innovative economic development [
5]. Therefore, firms with financial flexibility are more able to cope with risks in the uncertain environment and achieve sustainable development. In other words, firms that can adapt to the adverse environment and operate stably are truly firms with financial flexibility, which is reflected in the small fluctuations of stock returns in the capital market. Adequate financial resources are a necessary condition for firms to cope with environmental uncertainties. Gamba and Triantis [
6] believe that financial flexibility can be reserved by increasing internal cash reserves, enhancing debt financing ability, and improving equity financing ability.
Environmental, social, and governance (ESG) performance is an investment concept and evaluation tool focusing on environmental and social responsibility and corporate governance. It comprehensively assesses a firm’s environmental, social responsibility, and corporate governance performances. It provides stakeholders with additional non-financial information, enabling them to better assess the investment risks and benefits and more clearly judge the firm’s investment value [
7]. According to MSCI’s 2021 Global Institutional Investor Survey, global non-ESG equity funds saw cumulative outflows of
$700 billion through February 2021, in contrast to ESG equity funds, which saw cumulative inflows of
$450 billion. The ESG investment themes and strategies have become the main drivers of global equity inflows, and firms with good ESG performance have become the leading destinations for inflows. It shows that the ESG performance of a firm has become essential information to attract market attention and even change investors’ investment strategies. Once good ESG performance information of a firm is captured, interpreted, and evaluated by the market, its value may be discovered and invested in by more creditors or investors. Thus, good ESG performance information brings capital inflow to the firm, which increases the internal cash reserves and financing ability of firms and thereby enhances the financial flexibility of firms. Therefore, there is some correlation between ESG performance and financial flexibility.
Previous studies have found that there is no consistent relationship between ESG performance and corporate earnings realization. Sun and Hou [
8] and Engelhardt et al. [
9] believe that most emerging market countries have serious problems such as resource shortage, environmental pollution, insufficient regulation and governance, which lead to high ESG risk. Therefore, when making investment decisions in emerging markets, incorporating ESG factors into investment decisions can significantly improve investment performance. On the contrary, most developed market countries have relatively perfect institutions, complete ESG investment systems, and low ESG risks. Therefore, when making investment decisions in developed markets, both ESG investment and non-ESG investment have good performance, and ESG investment has no obvious advantage. Investing in ESG incurs additional costs, and the redistribution of resources from investors to stakeholders violates the classical profit maximization theory, which can harm firm’s profitability and market value [
10,
11]. Management may invest in ESG activities to build personal image at the expense of shareholders, which will exacerbate agency conflicts and damage firm’s market value [
12,
13]. George et al. and Waddock and Graves [
14] believe that a firm’s reputation is closely related to its social rating, and adopting ESG can provide costs and benefits similar to advertising campaigns. Therefore, strengthening ESG investment can reduce financing costs and increase firm’s value and market valuation [
15]. Thus, the relationship between ESG performance and financial flexibility is not clear.
China is the second largest economy in the world and an important emerging market. Since China’s reform and opening-up, China’s economic growth has made an increasing contribution to world economic growth. According to China’s National Bureau of Statistics, China’s economic growth contributed nearly 30 percent to world economic growth in 2018. China is the biggest contributor to world economic growth. Therefore, the study of China’s economy has an important impact on world economic growth. As the micro subject of market, the sustainable development of firms is of great significance to economic growth. Due to the imperfect capital market in China and the widespread problem of information asymmetry, Chinese firms are faced with large financing constraints [
16,
17]. In the environment of increasing uncertainty, financing constraints lead to the obstruction of external financing of firms, so that firms cannot obtain enough funds to improve financial flexibility to cope with adverse impacts, and sustainable development faces serious challenges.
Given the above problems, based on instrumental stakeholder theory, signaling, and social impact hypothesis, this paper uses A-share listed firms in China from 2015 to 2020 as samples to conduct theoretical analyses and empirical tests on the relationship between ESG performance and financial flexibility. It is found that ESG performance establishes a close relationship with stakeholders by transmitting positive signals to the outside world, improving organizational legitimacy, and improving operation and management efficiency, positively impacting financial flexibility. Financing constraints are derived from information asymmetry in the incomplete market, which reflects the financing ability of firms. Good ESG performance reduces the information asymmetry to a certain extent, which is conducive to alleviating financing constraints, improving firms’ financing ability, and enhancing financial flexibility. Further analysis shows that environmental uncertainty positively moderates the relationship between ESG performance and financial flexibility. Good ESG shows a higher value when the degree of uncertainty is high. As a kind of insurance, it can offset the negative impact of adverse shocks and maintain the competitive advantage of firms, enhancing financial flexibility. Market attention also has a positive moderating effect on them. As a limited resource, market attention can improve the transmission efficiency of ESG information in the capital market, enhance the convincing power of ESG performance, and improve the market reaction to ESG performance. Therefore, in the case of high market attention, the enhancement effect of ESG performance on financial flexibility is more significant.
We contribute to the existing literature in the following areas: (1) we add to the literature by exploring the economic consequences of ESG performance. Existing literature pays more attention to the influence of ESG on financial performance, a firm’s value, and stock value, while few studies comprehensively evaluate the relationship and mechanism between ESG performance and financial flexibility. Hang et al. [
18] and Xie et al. [
19] believe that a firm’s environmental responsibility is the performance of meeting stakeholders’ expectations. By meeting these needs, firms can obtain financial advantages and improve profitability to improve long-term financial performance. Qureshi et al. [
20] believe that the economic and social goals of firms are essentially the same, and they can enhance the loyalty of some stakeholders by undertaking social responsibilities and disclosing ESG information, thus improving firm value. Investors believe that firms with good ESG performance have stronger risk management ability and often give higher appraisal value to such firms, thus increasing the stock market valuation [
21]. Based on instrumental stakeholder theory, signaling, and social impact hypothesis, we explore the relationship between ESG performance and financial flexibility and expand the relevant literature on the economic consequences of ESG performance. (2) The present paper contributes to the literature by analyzing the influencing mechanism of financial flexibility. To cope with the increasing environmental uncertainties, firms must reserve financial flexibility to reduce the adverse impact of external shocks, avoid falling into financial distress, and provide funds at any time when favorable investment opportunities appear to seize potential development opportunities [
22]. We construct a theoretical analysis framework of ESG performance—financing constraints—financial flexibility; clarify the internal mechanism of ESG performance to improve financial flexibility; and enrich the relevant literature on the influencing factors of financial flexibility. (3) We analyze the differences in the impact of ESG performance on financial flexibility under environmental uncertainty, which provides empirical evidence and theoretical support for financial flexibility decision-making. (4) We also study the differences in the impact of ESG performance on financial flexibility under market attention, providing empirical evidence and theoretical support for firms to choose appropriate stakeholder management strategies.
The rest of the paper is arranged as follows.
Section 2 contains an extensive review of the literature and a theoretical framework for the research hypothesis.
Section 3 describes the sample, variable measurement, and statistical model.
Section 4 shows the results and discusses these results.
Section 5 further studies the moderating effects of environmental uncertainty and market concerns on the relationship between ESG performance and financial flexibility.
Section 6 is the conclusion and discussion section, which points out the theoretical contribution, practical significance, and future research direction of the study.
6. Discussion
At present, the degree of environmental uncertainty is deepening, and the sustainable development of firms is facing severe challenges. In the uncertain environment, firms need to reserve appropriate financial flexibility to cope with risks, stable operation, seize potential investment opportunities, and achieve sustainable development. ESG performance provides additional information to stakeholders and is an important consideration for stakeholders in their investment decisions. Good ESG performance can help firms gain the trust and support of stakeholders, thereby enhancing the cash holding and external financing ability.
The results in
Table 3 support H1, good ESG performance is beneficial to improving financial flexibility. Our results support the views of Hur et al. [
29], Olsen [
32], and Ng and Rezaee [
34], providing evidence of instrumental stakeholder theory and signaling theory. Firms can obtain scarce resources for sustainable development by managing stakeholder relationships. For example, firms with good relations with the government can convey political advantages to the market, gain recognition and trust from creditors and investors, and thus have more financing convenience, lower financing cost, and stronger financing ability. Good ESG performance can convey a positive signal of responsibility and ethics to the outside world, strengthen brand effect, enhance customer satisfaction and purchase intention of products, and improve corporate profitability and cash flow level. The improvement of financing ability, profitability, and cash flow makes firms have more sufficient resources to cope with adverse shocks, so as to improve the ability of firms to cope with environmental uncertainties and enhance financial flexibility.
Information asymmetry is the root cause of financing constraints. Due to the imperfect capital market in China, Chinese firms are generally faced with financing constraints. Under the increasingly severe environmental uncertainty, how to alleviate financing constraints, enhance financing ability, improve financial flexibility, and avoid falling into financial distress is an urgent problem for firms to achieve sustainable development. The results in
Table 3 also support H2, financing constraints have a mediating role in the process of ESG performance affecting financial flexibility. Our results support Deng et al. [
69] and Latane [
44] and provide evidence for social influence theory. Behaviors that violate the ESG concept will make stakeholders doubt the sustainable development ability of the firm, thereby increasing the return required by investors, raising the financing cost of the firm, aggravating financing constraints, and thus hindering the improvement of financial flexibility. On the contrary, improving ESG performance of firms can help improve organizational reputation, reduce information asymmetry, thus enhance investor confidence, alleviate financing constraints, raise funds, and improve financial flexibility. Therefore, ESG performance improves financial flexibility by releasing financing constraints.
Environmental uncertainty increases the risk of firm operation and default, deteriorates the financing environment and operation environment of firms, and poses a great threat to sustainable development. Then, does the degree of environmental uncertainty affect the relationship between ESG performance and financial flexibility? The results in
Table 6 suggest that ESG performance is more conducive to improving financial flexibility when the degree of environmental uncertainty is high. However, this enhancement effect is only reflected in improving the risk coping ability of firms, while hindering firms to hold cash and reserve surplus debt capacity. This may be because ESG performance acts as an insurance against the negative effects of an uncertain environment [
58]. But firms may take on more debt in response to external shocks, and investing in ESG further reduces the firm’s cash, thereby compromising its ability to hold cash and spare debt.
Market attention has loudspeaker and authentication functions, which can improve the speed and authority of ESG information transmission, thus enhancing the market response of ESG information. As a limited resource, the degree of market attention may have an impact on the relationship between ESG performance and financial flexibility. The results in
Table 7 suggest that the impact of ESG performance on financial flexibility is stronger when market concern is high. With the increase of market attention, the transmission efficiency and persuasion of ESG performance in the capital market are improved, which is beneficial to strengthen the release effect of ESG performance on financing constraints and better improve financial flexibility [
62].
7. Conclusions
Increasingly major environmental problems, the global spread of COVID-19, wars and conflicts, and trade barriers have made the environment rife with uncertainty and has led to firms facing significant challenges when working toward the goal of sustainable development. In this case, firms need to improve financial flexibility to meet future capital needs, avoid financial difficulties, and seize the development opportunities when they arise. Firms with good ESG performance can gain favor from investors, enhance financing ability raise funds, and improve financial flexibility. We explore the relationship between ESG performance and financial flexibility in this case. The paper finds that ESG performance and financial flexibility are significantly positively correlated. The mechanism results show that financing constraints mediate ESG performance and firms’ financial flexibility. The additional analysis suggests that environmental uncertainty and market attention have a significant positive moderating effect. The promoting effect is more pronounced when the firm is in a high uncertainty environment, and the same is true with high market attention.
Our results have important implications for corporate managers, policymakers, investors, and creditors. (1) In the case of environmental uncertainty, the firm can actively participate in ESG activities, disclose relevant information, and pay close attention to market participants, especially the institutional investors and analysts, to understand the relevant information. Thus, firms can better alleviate financing constraints, improve financial flexibility, enhance the ability to cope with uncertain environments, and achieve sustainable development. (2) Policymakers can establish relevant regulations and evaluate ESG disclosure to mobilize the initiative of the ESG responsibility of firms. In this way, ESG information can provide effective data support for investors to make decisions, guide capital to an ethical, responsible, and sustainable field, and improve the efficiency of resource allocation. (3) Investors and creditors can incorporate ESG factors into their investment strategies to identify firms with low operational and default risks, reducing investment risk and improving return on investment.
Our article is not without its limitations. First, we only use firms from mainland China as samples to explore the relationship between ESG performance and financial flexibility, so an analysis based on international data is lacking. Second, in terms of the measurement of the dependent variable, we use the methods commonly used in the literature—the standard deviation of monthly stock return and the sum of cash flexibility and debt flexibility to measure financial flexibility indirectly. We fail to use creative methods to measure financial flexibility directly, and cannot provide suggestions for how much financial flexibility to reserve. Third, considering that we only use Chinese firms as samples, we also only use ESG rating data disclosed by Huazheng which is more consistent with China’s national conditions, failing to compare the impact of ESG rating data from different institutions on conclusions, and failing to provide suggestions for firms on how to invest in ESG. Fourth, in addition to analyzing all samples as a whole, we only consider the differences in the relationship between ESG performance and the financial flexibility of manufacturing firms under different environmental uncertainties and market concerns without conducting in-depth research on more industries. Future research can use international data, a broader sample, and make a more detailed division of sample industries to reveal the relationship between ESG performance and financial flexibility. Future research could also take more creative approaches to measure financial flexibility and ESG performance directly and provide a more profound and straightforward analysis of the impact of ESG performance on financial flexibility.