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Can ESG Ratings Stimulate Corporate Green Innovation? Evidence from China

Sustainability 2022, 14(19), 12516; https://doi.org/10.3390/su141912516

by Heying Liu^* and Chan Lyu^*

Reviewer 1:

Chih-Hsuan Wang

Reviewer 2: Anonymous

Reviewer 3: Anonymous

Reviewer 4: Anonymous

Sustainability 2022, 14(19), 12516; https://doi.org/10.3390/su141912516

Submission received: 24 August 2022 / Revised: 26 September 2022 / Accepted: 26 September 2022 / Published: 30 September 2022

(This article belongs to the Special Issue Corporate Governance, Social Responsibility, Innovation, and Sustainable Business Development Goals)

Round 1

Reviewer 1 Report

Although ESG is a popular issue, this submission has the following shortcomings:

1. A research framework is needed to indicate the predictive factors and the dependent outcome, including the moderators and associated hypotheses.

2. A Table is required to compare this research to past publications. Otherwise, research contributions are too weak to justify.

3. Research motives are not clearly described. What real scenarios stimulate this research?

4. All hypotheses, predictors, dependent outcome should be supported by cited references. Please provide evidence to justify research framework.

5. Eqs. (1) – (5) are not clearly explained. What are their differences? Firm performance like ROE and EPS are not shown in these equations.

6. All variables in Table 1 are numeric? No categorical variables? Correlation coefficients are used only for numerical variables.

7. Except for the dependent outcomes, why are the variables shown in Table 2 different from Table 1? Data samples need to be clearly described in the text.

8. In Table 3, adjusted R² are extremely low. This results imply low fitness and explanative power for the constructed models. So do Table 4 and Table 5.

9. Managerial insights are insufficient or vague. For a frim or a government, what does do they obtain based on your research?

10. Why did the authors mark red contents in Conclusions? Data availability is missing. It should be provided.

11. Please add a Section, Discussions, to strengthen managerial insights. research limitations can be also included.

Author Response

Please see the attachment.

We quite appreciate your favorite consideration and the reviewers’insightful comments concerning our manuscript entitled . Those comments are very valuable and helpful for improving the quality and readability of our paper, as well as the important guiding significance to our future researches. We have studied the comments carefully and have revised the paper exactly according to the reviewers’ comments. We hope this revision can meet with approval. The revised portions are marked in red in the paper and the main revisions corresponding to the reviewers’ comments are as follows:

Point 1: A research framework is needed to indicate the predictive factors and the dependent outcome, including the moderators and associated hypotheses.

Response 1: Thanks for your comment. It is the important deficiencies in this research. We added the research framework ,as following :

Figure 1 Theoretical research model

Point 2: A Table is required to compare this research to past publications. Otherwise, research contributions are too weak to justify.

Response 2: As the reviewer suggested,we cited many pasted research in Literature Review,as following:

Environmental, social, and corporate governance (ESG) is an extension and en-richment of the socially responsible investment (SRI) concept and is an important measure of corporate sustainable development [4,5]. With the rise of the green concept, an in-creasing number of companies accept the evaluations of ESG rating agencies. This means that the impact of ESG ratings on corporate strategy has become an important focus of academic attention. However, existing research on the response to the effectiveness of ESG ratings is controversial. Scholars who support ESG ratings argue that such assessments objectively and effectively measure a company's ESG efforts through its competitive advantage, social reputation, and operating performance, provide stakeholders with comprehensive and comparable data to correct information asymmetries [6], provide access to resources, and reducethe regulatory and reputational risks [7,8]. A higher ESG rating performance of a company reduces the cost of equity capital [9] and debt [10]. If a credit market is depressed, ESG should be an important tool to enhance corporate finance [11]. Moreover, ESG can help firms to hedge risks [12], build trust against shocks in a crisis [13], and improve corporate performance and long-term value [14]. In contrast, other scholars argue that ESG ratings are ineffective, arguing that they lead to symbolic compliance with external requirements in order to obtain various benefits, which may not be effective in improving corporate sustainability behavior [15]; rather, they represent institutional regression and may mislead stakeholders [16,17]. These contrasting views have led to a large number of studies on the effectiveness of ESG ratings, most of which have examined the relationship between ESG ratings and firm financial performance [18,19] or capital market reactions [20,21]. These studies have undoubtedly contributed significantly to our understanding of the impact of ESG, however, few studies have examined corporate sustainability investment responses following ESG ratings, and even fewer have focused on their impact on corporate green innovation.Meanwhile, The green technology is featured by "dual externalities" based on green innovation [22]. At the macro level, the external spillover effect of green innovation technology reduces costs, increases environmental protection, and achieves high-quality economic development; At the micro level, enterprises reshape their development model, introduce new concepts of energy conservation and emission reduction, and promote green transformation of enterprises. Therefore, we still can not predict how ESG would impact enterprise strategic decision-making about green innovation and the aforementioned relationship's mecha-nism [23]. This paper will explore the impact of ESG rating on the green innovation strategy of businesses to compensate for shortcomings in relevant domains in light of the actions of firms and the significance of their participation in sustainable development activities [24].

Reference :

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Zhang, F.; Qin, X.; Liu, L. The interaction effect between ESG and green innovation and its impact on firm value from the perspective of information disclosure. Sustainability 2020, 12, 1866.
Montiel, I.; Cuervo-Cazurra, A.; Park, J.; Antolín-López, R.; Husted, B.W. Implementing the United Nations’ sustainable development goals in international business. J. Int. Bus. Stud. 2021, 52, 999-1030.

Previous research literature

ESG outcome	Factors of Green Innovation Influencing
Corporate Social Responsibility	Customer benefits and supplier interests
Enterprise Performance	Intellectual Capital
Corporate Value / Shareholder Value	Resource commitments
Corporate Innovation	Environmental Regulations
Corporate Finance	Government subsidies and tax policy
Debt Costs	Executive Characteristics
Sustainability	Green Finance / Credit Policy
Equity Earnings	tional environment

In conclusion, based on the existing literature review, it is found that whether it is the consequences of ESG strategy or the influencing factors of green innovation, ESG and corporate green innovation are rarely studied together, and the influence mechanisms between the above relationships are not yet clear. Therefore, based on the research perspective of ESG, this paper introduces two moderating variables, namely, external institutional environment and internal organizational redundant resources, by combining institutional theory and resource-based viewpoints, to investigate the boundary conditions between ESG and corporate green innovation, which enriches and expands the existing literature research.

Point 3: Research motives are not clearly described. What real scenarios stimulate this research?

Response 3: Thanks for your comment. It is the important deficiencies in this research,wherefore we revised the part of introduction ,as following :

Enterprises are reforming their business philosophies in response to the necessity for social responsibility brought on by sustainable development. Friedman once held that enterprises’ main social obligation is to maximize their profits [1]. Other accountability obligations imposed on enterprises are infeasible and disrupt the market economy. However, the increasingly prominent social issues related to sustainability, such as climate change, wealth disparity, and infectious diseases, and the frequent political re-sistance of national response actions [3] have vacillated many viewpoints on maximizing shareholders' interests [2]. Enterprises are required to incorporate Environmental (E), Social (S) and Governance (G) factors into investment decisions and seek solutions to social problems at the enterprise level by practicing ESG concepts combined with the coordi-nation of international organizations. Investors and government policies are presently highly interested in ESG. The impact of COVID-19 is rising the market share of global responsible investment in response to the green recovery. The number of institutions endorsing the United Nations-supported principles of responsible investment surged by 28% in 2020. Despite the late start of China's ESG growth, all facets of society have given it more attention. ESG policies and investment have been greatly improved, particularly since Chinese Chairman Xi proposed the UN General Assembly's "2060 carbon neu-trality" objective.

Point 4: All hypotheses, predictors, dependent outcome should be supported by cited references. Please provide evidence to justify research framework.

Response 4: Thanks for your comment. It is the important deficiencies in this paper, wherefore added the cite references from hypotheses, predictors, dependent outcome aspects as following :

According to institutional theory, the institutional environment has a crucial in-fluence on the structure and behavior of an organization [34]. An efficient legal system, good government market relations, and well-developed product and factor markets can support healthy market development by facilitating information flows, supporting competition, and minimizing externalities [35]. Firms that respond effectively to insti-tutional pressures and comply with norms and rules have easier access to external re-sources needed for survival and growth by ensuring social legitimacy [36]. Accordingly, in order to operate smoothly and stably, firms need to respond to institutional pressures [37], and the level of institutional pressures affects the strategic choices and effectiveness of firms[38]. Meanwhile, the resources and regulations on which green innovation depends are key variables for innovation, while the access to core resources depends on a com-bination of market-based and non-market-based strategies, which is determined by the institutional environment. For example, companies need to improve their ESG rating performance to respond to stakeholder pressure [39]. Therefore, the impact of firm ESG ratings on green innovation may vary depending on the role of pressures from the in-stitutional environment, and it is necessary to investigate the impact of each type of in-stitutional pressure [40] on green innovation by interacting with firm ESG ratings, which can be classified as coercive, normative, and imitative.

First, coercive pressures are defined as "formal or informal pressures arising from the institutions and regulations of the society to which the firm belongs" [41]. Coercive pressures resulting from the influence of those in power, such as regulation by gov-ernment agencies, can shape standards of corporate behavior and encourage firms to adopt or reinforce certain behaviors [40]. In this regard, ESG-related government policies and regulations constitute coercive pressures on firms that influence their needs and expectations for green innovation strategies. Second, imitation pressure refers to the pressure to imitate competitors' behavior, which is identified as success. A firm that adapts to imitation pressure is more likely to protect itself from potential losses and gain le-gitimacy in its decisions. Thus, it imitates leading competitors to ensure social legitimacy and decision legitimacy [41,42]. From this perspective, ESG rating performance reflects imitation of peer organizations' behavior, which is perceived as successful by stakeholders in a similar organizational structure [42]. For example, manufacturers tend to imitate their competitors in managing extended supply chain activities in order to achieve sustainably managed carbon reduction targets. This measure can increase corporate green innovation by enhancing the legitimacy and legality of corporate activities [43]. Normative pressure comes from the values and standards of behavior recommended and expected by external stakeholders 40[ 48 ]. Firms must understand and comply with the standards, norms and expectations of external stakeholders in order to achieve social legitimacy. In particular, customer demands form a key normative pressure [44], which can be an important driver for companies to enhance certain activities [40]. For example, positive consumer per-ceptions of a firm's environmentally friendly products and socially responsible activities can change a firm's green innovation decisions by acting as a normative pressure [45].

Thus, on the one hand, in regions with relatively well-developed institutional en-vironments, the three legitimacy pressures mentioned above enhance the impact of ESG ratings on a firm's reputation and image, and the key factors of ESG rating performance depend mainly on its market-oriented operations and management capabilities, which are consistent with entrepreneurs' knowledge dominance and social legitimacy percep-tion structures. This will undoubtedly strengthen the role of ESG rating performance in promoting corporate green innovation strategies. On the other hand, a sound institutional environment can provide the necessary property rights protection, guarantee the benefits of strategic decisions, enhance the long-term orientation of decision makers, further strengthen the motivation of enterprises to engage in green innovation driven by ESG performance [46], effectively protect the green innovation achievements of enterprises, and enhance their willingness to green innovation. Therefore, hypothesis 2 is proposed.

Reference :

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Ciszewska-Mlinarič, M.; Trąpczyński, P. Foreign market adaptation and performance: The role of institutional distance and organizational capabilities. Sustainability 2019, 11, 1793.
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Point 5: Eqs. (1) – (5) are not clearly explained. What are their differences? Firm performance like ROE and EPS are not shown in these equations.

Response 5: As the reviewer suggested,we revised the part ,as following:

First, formula (1)-(3) focuses on different types of green patent innovation. Equations (1)-(3) represent the dependent variables of the total number of green patent applications, the total number of green invention patent applications and the total number of green utility model patent applications for enterprises, respectively.

Second, the formula (4)-(5) focuses on two different moderating variables. Equations (4) - (5) represent the moderating effects of institutional environment and organizational redundant resources, respectively. Equations (1)-(5) are different.

In order to verify the influence of ESG rating on corporate green innovation and the moderating effect of the institutional environment and organize redundant resources, the following regression models were established by referring to the model settings of Wen and Zhou, 2017.

（1）

（2）

（3）

（4）

（5）

In the above formulas, subscript i represents the listed company, and t represents the year, ε represents the random errorterm; GRInno represents corporate green innovation; GRInva and GRUma represent exploratory green innovation and exploitative green innovation, respectively; ESG represents ESG rating; InEnv represents institutional environment; OrRes represents organizational redundant resources; Control represents control variables.

Point 6: All variables in Table 1 are numeric? No categorical variables? Correlation coefficients are used only for numerical variables.

Response 6: Thanks for your comment. It is the important deficiencies in this paper, wherefore we has been modified for Table 1

Point 7: Except for the dependent outcomes, why are the variables shown in Table 2 different from Table 1? Data samples need to be clearly described in the text.

Response 7: Thanks for your comment. It is the important deficiencies in this paper, wherefore we has been modtified the variables of Table 1 and Table 2 as following :

Point 8: In Table 3, adjusted R² are extremely low. This results imply low fitness and explanative power for the constructed models. So do Table 4 and Table 5.

Response 8: As the reviewer suggested,we revised the part of models, regression using a fixed-effects model revealed a significant increase in R2, as following:

Table 2. The regression results of ESG rating on corporate green innovation.

	(1)	(2)	(3)
	GRInno	GRInva	GRUma
ESG	0.019***	0.017***	0.011***
	(3.789)	(4.247)	(2.968)
Size	0.046***	0.043***	0.026***
	(4.405)	(4.968)	(3.158)
Age	0.118*	0.116**	0.055
	(1.806)	(2.153)	(1.071)
Top1	-0.075	-0.012	-0.070
	(-1.199)	(-0.237)	(-1.438)
Roa	0.519***	0.306***	0.380***
	(5.679)	(4.063)	(5.338)
Lev	0.121***	0.101***	0.068**
	(2.938)	(2.988)	(2.139)
Board	0.015	0.016	-0.018
	(0.327)	(0.406)	(-0.490)
Inde	-0.069	-0.037	-0.070
	(-0.540)	(-0.350)	(-0.701)
Dualiy	0.002	-0.005	0.002
	(0.160)	(-0.430)	(0.176)
Constant	-1.000***	-1.081***	-0.433*
	(-3.247)	(-4.262)	(-1.804)
Industry FE	Yes	Yes	Yes
Year FE	Yes	Yes	Yes
N	21616	21616	21616
Adj.R²	0.692	0.673	0.643

Table 3. The moderating effect of institutional environment and organizational redundant resources.

	(1)	(2)	(3)
	GRInno	GRInno	GRInno
ESG	0.019***	0.018***	0.019***
	(3.939)	(3.647)	(3.799)
InEnv	-0.004		-0.004
	(-0.360)		(-0.390)
ESG×InEnv	0.009***		0.009***
	(3.819)		(3.790)
OrRes		0.001	0.001
		(0.449)	(0.461)
ESG×OrRes		0.067**	0.066**
		(2.140)	(2.092)
Size	0.046***	0.045***	0.046***
	(4.447)	(4.337)	(4.380)
Age	0.113*	0.116*	0.112*
	(1.732)	(1.765)	(1.695)
Top1	-0.079	-0.075	-0.079
	(-1.265)	(-1.198)	(-1.264)
Roa	0.520***	0.518***	0.519***
	(5.690)	(5.667)	(5.679)
Lev	0.118***	0.129***	0.126***
	(2.881)	(2.923)	(2.875)
Board	0.014	0.017	0.015
	(0.289)	(0.365)	(0.327)
Inde	-0.058	-0.069	-0.058
	(-0.452)	(-0.537)	(-0.450)
Dualiy	0.002	0.002	0.002
	(0.122)	(0.157)	(0.119)
Constant	-1.261***	-1.265***	-1.248***
	(-3.004)	(-2.993)	(-2.958)
Industry FE	Yes	Yes	Yes
Year FE	Yes	Yes	Yes
N	21616	21616	21616
Adj.R²	0.692	0.692	0.692

Table 4. Substitute variable for corporate green innovation.

	(1)	(2)	(3)	(4)
	GRInva	GRUma	GRInva	GRUma
ESG	0.018***	0.012***	0.017***	0.011***
	(4.421)	(3.097)	(4.118)	(2.796)
InEnv	0.002	-0.002
	(0.189)	(-0.191)
ESG×InEnv	0.009***	0.006***
	(4.315)	(3.248)
OrRes			0.004	0.002
			(1.491)	(0.666)
ESG×OrRes			0.065***	0.064***
			(2.653)	(2.605)
Size	0.043***	0.026***	0.042***	0.025***
	(5.009)	(3.192)	(4.887)	(3.073)
Age	0.111**	0.051	0.123**	0.054
	(2.068)	(1.007)	(2.272)	(1.045)
Top1	-0.016	-0.073	-0.015	-0.070
	(-0.305)	(-1.493)	(-0.286)	(-1.442)
Roa	0.306***	0.381***	0.308***	0.380***
	(4.071)	(5.346)	(4.096)	(5.328)
Lev	0.098***	0.067**	0.121***	0.078**
	(2.907)	(2.087)	(3.336)	(2.260)
Board	0.014	-0.019	0.017	-0.016
	(0.367)	(-0.522)	(0.436)	(-0.442)
Inde	-0.026	-0.063	-0.034	-0.070
	(-0.244)	(-0.625)	(-0.319)	(-0.695)
Dualiy	-0.005	0.001	-0.005	0.002
	(-0.478)	(0.143)	(-0.480)	(0.168)
Constant	-1.004***	-0.383	-1.027***	-0.376
	(-3.953)	(-1.593)	(-4.029)	(-1.559)
Industry FE	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes
N	21616	21616	21616	21616
Adj.R²	0.674	0.644	0.673	0.644

Point 9: Managerial insights are insufficient or vague. For a frim or a government, what does do they obtain based on your research?

Response 9: As the reviewer suggested, we added the part of conclusions from aspect of grovement and firm(the board of directors), as following :

For members of the board of directors, they should take the initiative that taking responsibility for environmental preservation and social responsibility, while concentrating on corporate governance and non-financial performance in order to maintain sustainable development and competitive advantage. High ESG performance also means that the enterprise will have a larger boost over rivals in the market. Board members focus on improving their ESG performance in order to enhance their corporate green innovation capabilities, attract value investment from investors with an ESG bias, and generate higher market competitiveness. This is due to ESG performance plays a key role in promoting corporate green innovation. Moreover, board members shall take the initiative to assume environmental protection and social responsibilities, lay emphasis on corporate governance and non-financial performance, cognitive modeling of ESG concept and the allocation of organizational redundant resources to green innovation strategy, and form a green sustainable development system quickly.

For strategic investors, enterprise 's ESG performance is critical to investors since it somewhat indicates how well-run and innovative the business is. ESG scores are therefore non-financial indicators which investors may use to evaluate the worth of a company's investment when choosing investment targets in order to better manage risks and earn matching long-term returns.

For the government as the policy-maker, it ought to give the encouragement and promotion of ESG performance more attention. To further encourage businesses to adopt sound ESG ideas and advance the development of their environmental, social, and corporate governance capabilities, the government and pertinent ministries should release related policies and privileged regulations, and this is beneficial to improve the regional institutional environment and push the development of corporate green innovation.

Point10: Why did the authors mark red contents in Conclusions? Data availability is missing. It should be provided.

Response 10: It's accurate to say that the mark indicates a first-time modification, as the reviewer noted.

Point11: Please add a Section, Discussions, to strengthen managerial insights. research limitations can be also included.

Response 11: As the reviewer suggested, we added the part of conclusions from aspect of grovement ,and added the contributions and research limitations,as following:

Discussion:

To make ESRs more sustainable, the government may potentially raise taxes and other penalties. Through punitive measures like tax increases, the government can also force companies with poor ESG performance to improve their performance. The gov-ernment should also actively promote an ESG disclosure system that is broadly applicable so that businesses, investors, and the general public will pay more attention to the ESG performance of businesses and support the transition to a green economy.The main contributions of this study are as follows. First, it responds to the debate surrounding the effectiveness of ESG in emerging markets by providing new insights into the relationship between corporate ESG ratings and green innovation and their mechanisms of action. Existing research on ESG ratings has focused on developed markets that have developed relatively mature concepts. For example, Chouaibi (2021) analyzes ESG practices in the UK and German systems to improve financial performance by benefiting from green innovation [57]. Meanwhile, Cohen (2020) reached a different conclusion and pointed out the opposite relationship between ESG scores and green innovation in the U.S. energy sector [58]. Existing studies are limited and focus on developed countries with relatively mature ESG systems. In contrast, emerging markets are still in their infancy due to significant institutional differences. The findings of this study help to answer whether ESG ratings contribute to the green transition and enrich the results related to ESG practices in developing countries. Second, this study further expands the influencing factors of green innovation beyond the mainstream research paradigm of government-level environ-mental regulations on green innovation, with special emphasis on third-party rating agencies, providing new perspectives and empirical support for the guiding role of ESG ratings on green innovation. Third, this study expands the scope of green innovation measurement to compensate for the existing literature's preference for green innovation in terms of quantity rather than quality. Drawing on detailed patent census data in China, this study uses green patent citations to measure the quality of green innovation, which is conducive to deriving more meaningful research questions, emphasizing objective data on green innovation patent applications, and improving their impact. Fourth, this study analyzes the moderating mechanism between ESG ratings and green innovation through the external institutional environment and internal organizational redundancy resources, deconstructs the internal logic, extends the research boundary, and provides a realistic reference for the promotion of ESG ratings by examining the heterogeneity in the Chinese context from multiple dimensions such as institutions, markets, and firms as emerging markets continue to develop.

This study provides a new theoretical framework for corporate green innovation by highlighting the importance of external institutional environment and internal organi-zational redundancy resources for corporate green innovation. However, there are still some limitations in our research.

First, the primary limit to our study is linked to the nature of our sample, which only includes companies in China and companies listed in other emerging countries should be included. Meanwhile, other factors influencing ESG performance (e.g. systematic risk and board structure) should also be taken into consideration in further research. As a future research perspective, we could examine other factors affecting the market. In the future, we can attempt to obtain data from other third-party platforms and involve more samples with different languages. some alternative variables can measure green innovation more than the patent application measurement, and some updated research date can replace relevant indicators to make a comprehensive measurement on the level of green inno-vation

Second, the findings of this paper are also limited in terms of the mechanisms that enhance corporate green innovation, which need to be explored and further tested. In terms of future research directions in terms of moderating mechanisms, although this study investigated the institutional environment and organizational redundancy re-sources as moderating factors, other factors such as political capital, environmental ethics, or top management's characteristics may also influence the relationship between ESG ratings and corporate green innovation.What’s more, we will conduct a heterogeneity analysis concerning the discrepancies in diverse industries and property rights to reveal the impact level of ESG rating on corporate green innovation.

Reference :

Chouaibi, S.; Chouaibi, J.; Rossi, M. ESG and corporate financial performance: the mediating role of green innovation: UK common law versus Germany civil law. EuroMed Journal of Business 2021.
Cohen, L.; Gurun, U.G.; Nguyen, Q.H. The ESG-innovation disconnect: Evidence from green patenting; National Bureau of Economic Research: 2020.

Author Response File: Author Response.pdf

Reviewer 2 Report

The paper is interesting, well organized, logical. Empirical part is supported by well composed methods. There are only few elements missing:

- line 52-56 about micro and macro level of impact I would add a source od this information,

- the aim od this paper should be more exposed and stated,

Chapter 4.2 - correlation is significant, but very low, close to zero, which makes the confirmation od hypotheses doubtful

Author Response

Please see the attachment

We quite appreciate your favorite consideration and the reviewers’ insightful comments concerning our manuscript entitled . Those comments are very valuable and helpful for improving the quality and readability of our paper, as well as the important guiding significance to our future researches. We have studied the comments carefully and have revised the paper exactly according to the reviewers’ comments. We hope this revision can meet with approval. The revised portions are marked in red in the paper and the main revisions corresponding to the reviewers’ comments are as follows:

Point 1: Line 52-56 about micro and macro level of impact I would add a source od this information,

Response 1: Thanks for your comment. It is the important deficiencies in this research, wherefore we revised the part of introduction , add a source about this information, as following:

Environmental, social, and corporate governance (ESG) is an extension and en-richment of the socially responsible investment (SRI) concept and is an important measure of corporate sustainable development [4,5]. With the rise of the green concept, an in-creasing number of companies accept the evaluations of ESG rating agencies. This means that the impact of ESG ratings on corporate strategy has become an important focus of academic attention. However, existing research on the response to the effectiveness of ESG ratings is controversial. Scholars who support ESG ratings argue that such assessments objectively and effectively measure a company's ESG efforts through its competitive advantage, social reputation, and operating performance, provide stakeholders with comprehensive and comparable data to correct information asymmetries [6], provide access to resources, and reducethe regulatory and reputational risks [7,8]. A higher ESG rating performance of a company reduces the cost of equity capital [9] and debt [10]. If a credit market is depressed, ESG should be an important tool to enhance corporate finance [11]. Moreover, ESG can help firms to hedge risks [12], build trust against shocks in a crisis [13], and improve corporate performance and long-term value [14]. In contrast, other scholars argue that ESG ratings are ineffective, arguing that they lead to symbolic compliance with external requirements in order to obtain various benefits, which may not be effective in improving corporate sustainability behavior [15]; rather, they represent institutional regression and may mislead stakeholders [16,17]. These contrasting views have led to a large number of studies on the effectiveness of ESG ratings, most of which have examined the relationship between ESG ratings and firm financial performance [18,19] or capital market reactions [20,21]. These studies have undoubtedly contributed significantly to our understanding of the impact of ESG, however, few studies have examined corporate sustainability investment responses following ESG ratings, and even fewer have focused on their impact on corporate green innovation.Meanwhile, The green technology is featured by "dual externalities" based on green innovation [22]. At the macro level, the external spillover effect of green innovation technology reduces costs, increases environmental protection, and achieves high-quality economic development [23] ; At the micro level, enterprises reshape their development model, introduce new concepts of energy conservation and emission reduction, and promote green transformation of enterprises [24]. Therefore, we still can not predict how ESG would impact enterprise strategic decision-making about green innovation and the aforementioned relationship's mecha-nism. This paper will explore the impact of ESG rating on the green innovation strategy of businesses to compensate for shortcomings in relevant domains in light of the actions of firms and the significance of their participation in sustainable development activities.

Reference :

Friedman, M. The social responsibility of business is to increase its profits. In Corporate ethics and corporate governance; Springer: 2007, 173-178.
Hambrick, D.C.; Wowak, A.J. CEO SOCIOPOLITICAL ACTIVISM: A STAKEHOLDER ALIGNMENT MODEL. Acad. Manag. Rev. 2021, 46, 33-59.
Nguyen, P.A.; Kecskes, A.; Mansi, S. Does corporate social responsibility create shareholder value? The importance of long-term investors. J. Bank. Financ. 2020, 112.
Michelson, G.; Wailes, N.; Van Der Laan, S.; Frost, G. Ethical investment processes and outcomes. Journal of Business Ethics 2004, 52, 1-10
Nekhili, M.; Boukadhaba, A.; Nagati, H.; Chtioui, T. ESG performance and market value: the moderating role of employee board representation. Int. J. Hum.Resour. Manag. 2021, 32, 3061-3087.
Cappucci, M. The ESG integration paradox. J. Appl. Corp.Financ. 2018, 30, 22-28.
Buallay, A. Is sustainability reporting (ESG) associated with performance? Evidence from the European banking sector, Manag. Environ. Qual. Int. J. 2019,98–115.
Humphrey, J.E.; Lee, D.D.; Shen, Y. The independent effects of environmental, social and governance initiatives on the performance of UK firms. Aust. J. Manag. 2012, 37, 135-151.
Ben Hmiden, O.; Rjiba, H.; Saadi, S. Competition through environmental CSR engagement and cost of equity capital. Financ. Res. Lett. 2022, 47, 102773.
Goss, A.; Roberts, G.S. The impact of corporate social responsibility on the cost of bank loans. J. Bank. Financ. 2011, 35, 1794-1810.
Ng, T.-H.; Lye, C.-T.; Chan, K.-H.; Lim, Y.-Z.; Lim, Y.-S. Sustainability in Asia: The roles of financial development in environmental, social and governance (ESG) performance. Soc. Indic. Res. 2020, 150, 17-44.
Albuquerque, R.; Koskinen, Y.; Zhang, C. Corporate social responsibility and firm risk: Theory and empirical evidence. Manag. Sci. 2019, 65, 4451-4469.
Lin, Y.; Fu, X.; Fu, X. Varieties in state capitalism and corporate innovation: Evidence from an emerging economy. J. Corp. Financ. 2021, 67, 101919.
Broadstock, D.C.; Chan, K.L.; Cheng, L.T.W.; Wang, X.W. The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China. Financ. Res. Lett. 2021, 38, 101716.
Garvey, G.T.; Kazdin, J.; Nash, J.; LaFond, R.; Safa, H. A pitfall in ethical investing: ESG disclosures reveal vulnerabilities, not virtues. Not Virtues (September 19, 2016) 2016.
Avetisyan, E.; Hockerts, K. The consolidation of the ESG rating industry as an enactment of institutional retrogression. Bus. Strat. and the Environ. 2017, 26, 316-330.
Entine, J. The myth of social investing: A critique of its practice and consequences for corporate social performance research. Organ. Environ. 2003, 16, 352-368.
Atan, R.; Razali, F.A.; Said, J.; Zainun, S. Environmental, social and governance (ESG) disclosure and its effect on firm’s performance: A comparative study. Inter.J. Econ. Manag. 2016, 10, 355-375.
Friede, G.; Busch, T.; Bassen, A. ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Sustain. Financ.Inves. 2015, 5, 210-233.
Feng, J.; Goodell, J.W.; Shen, D. ESG rating and stock price crash risk: Evidence from China. Finance Res. Lett.2022, 46, 102476.
Eliwa, Y.; Aboud, A.; Saleh, A. ESG practices and the cost of debt: Evidence from EU countries. Crit. Perspect. Accoun. 2021, 79, 102097.
Jang, G.-Y.; Kang, H.-G.; Lee, J.-Y.; Bae, K. ESG scores and the credit market. Sustainability 2020, 12, 3456.
Zhang, F.; Qin, X.; Liu, L. The interaction effect between ESG and green innovation and its impact on firm value from the perspective of information disclosure. Sustainability 2020, 12, 1866.
Montiel, I.; Cuervo-Cazurra, A.; Park, J.; Antolín-López, R.; Husted, B.W. Implementing the United Nations’ sustainable development goals in international business. J. Int. Bus. Stud. 2021, 52, 999-1030.

Point 2: the aim od this paper should be more exposed and stated.

Response 2: As the reviewer suggested, in the introduction, we revised the motivation and purpose of the study to make it clearer. As all of the first points show.In addation, we added the part of conclusions from aspect of grovement and firm(the board of directors), further clarify the purpose of the study, as following :

Point 3: Chapter 4.2 - correlation is significant, but very low, close to zero, which makes the confirmation od hypotheses doubtful

Response 3: As the reviewer suggested,we revised the part of descriptive statistics and correlation analysis, as following

Firstly, the regression results in this work focus on statistical significance and use a fixed-effects model. Small regression coefficients are also more typical with panel data, like Zheng et al. (2021) 、Zheng et al. (2022).The size of the regression coefficient is related to the size of the data for the variables in this paper, and since the dependent variable takes the natural logarithm, which lowers its value, this may be the primary cause of the low regression coefficient.

Secondly, the reason for the small regression coefficient may be the unit problem of the independent and dependent variables.In order to support the theoretical premise, the empirical examination of panel data concentrates on statistical significance, and this paper's findings support that focus.

Reference：

Zheng, J., Khurram, M. U., & Chen, L. (2022). Can Green Innovation Affect ESG Ratings and Financial Performance? Evidence from Chinese GEM Listed Companies. Sustainability, 14(14), 1-32

Zheng, J., Shao, X., Liu, W., Kong, J., & Zuo, G. (2021). The impact of the pilot program on industrial structure upgrading in low-carbon cities. Journal of Cleaner Production, 290, 1-11

Author Response File: Author Response.pdf

Reviewer 3 Report

I found the topic of the study interesting and quite timely, given the increasing pressure on companies to increase green investments. Below I provide some suggestions for making further improvements.

Introduction

The authors state that: “The number of institutions endorsing the United Nations-supported principles of responsible investment surged by 28% in 2020” (page 2, line 37). It is necessary to indicate the source of this data.

On page 2 line 46, The authors state that “Moreover, most research concludes that ESG considerably enhances enterprise performance and long-term value [9]” “…These studies unquestionably contribute significantly to our understanding of the impact of ESG”. It would be appropriate to integrate the literature since the authors mention several studies but mention only one.

Further, the authors should briefly discuss their main findings in this section. In its current form, once has to wait until the findings section to understand the same.

Literature review

The authors may look into some sort of theoretical frameworks (eg stakeholder, legitimacy) to explain the motivation for firms to stimulate Corporate Green Innovation.

Many citations are missing. For example, on page 3, line 114 “Second, it enhances the legitimacy of green innovation investment. The enterprise ESG advantage’s most distinctive feature is its legitimacy. Environmental protection, stakeholder rights and interests protection, and upholding social obligations are not just what customers and investors expect from corporations but are also slowly becoming what regulatory agencies require of them”; on page 3, line 121 “On the contrary, if an enterprise violates the ESG concept, it may arise wide public concern quickly, impairing its enterprise image and brand reputation significantly; hence the legitimacy of enterprise operation will become more prominent”; on page 3 line 127 “ESG advantages address the legal issue of green innovation, and endow enterprises with flexible green innovation strategies, which in turn improve the level of green innovation. What’s more, the general recognition of the legitimacy of the ESG concept lowers the transfer costs of the green technology, brand reputation and institutional mechanism obtained through ESG practice, facilitating to obtain green innovation resources and realizing the driving effect of ESG advantages on enterprise strategy”; on page 4 line 147 “However, in the transition economy, non-market strategies (such as relationship networks) have an important impact on green innovation. One of the main reasons is that the resources and regulations on which green innovation depends are the key variables of innovation, while the acquisition of core resources relies on the combination of marketization and non-marketization strategies, which is determined by the institutional environment”, etc.

Section “Moderation effect of institutional environment” needs extensive rewriting. The authors report a discussion of the results of the work rather than a review of the literature supporting the research hypothesis. You should use section “Literature Review and Hypothesis Development” to support your research hypothesis(s) so you want to make sure that you do not include superfluous material.

Method

Nothing much to change.

Conclusion

Needs improvements. It is necessary highlights the need for a more informative discussion regarding the results.

Theoretical implications are lacking.

Author Response

Please see the attachment

Point 1: Introduction

Further, the authors should briefly discuss their main findings in this section. In its current form, once has to wait until the findings section to understand the same.

Response 1: Thanks for your comment. It is the important deficiencies in this research,wherefore we revised the part of introduction ,as following :

We add to main findings in this section :

Based on the panel data of China's A-share listed companies from 2009 to 2020, this paper employs the fixed effect model to empirically analyze the relationship between the ESG rating of the sample enterprises and the green innovation performance of the enterprises, and further tests the regulatory effect of the external institutional environment and the redundant resources of the internal organization. The following conclusions are obtained: (i) ESG rating has significantly promoted green innovation; (ii) the completeness of the institutional environment and the abundance of organizational redundancy will strengthen the positive impact of ESG rating on corporate green innovation. The findings demonstrate that market businesses may successfully react to a complex business environment thanks to the strategic flexibility provided by ESG rating performance. ESG rating performance.

Reference :

Friedman, M. The social responsibility of business is to increase its profits. In Corporate ethics and corporate governance; Springer: 2007, 173-178.
Hambrick, D.C.; Wowak, A.J. CEO SOCIOPOLITICAL ACTIVISM: A STAKEHOLDER ALIGNMENT MODEL. Acad. Manag. Rev. 2021, 46, 33-59.
Nguyen, P.A.; Kecskes, A.; Mansi, S. Does corporate social responsibility create shareholder value? The importance of long-term investors. J. Bank. Financ. 2020, 112.
Michelson, G.; Wailes, N.; Van Der Laan, S.; Frost, G. Ethical investment processes and outcomes. Journal of Business Ethics 2004, 52, 1-10
Nekhili, M.; Boukadhaba, A.; Nagati, H.; Chtioui, T. ESG performance and market value: the moderating role of employee board representation. Int. J. Hum.Resour. Manag. 2021, 32, 3061-3087.
Cappucci, M. The ESG integration paradox. J. Appl. Corp.Financ. 2018, 30, 22-28.
Buallay, A. Is sustainability reporting (ESG) associated with performance? Evidence from the European banking sector, Manag. Environ. Qual. Int. J. 2019,98–115.
Humphrey, J.E.; Lee, D.D.; Shen, Y. The independent effects of environmental, social and governance initiatives on the performance of UK firms. Aust. J. Manag. 2012, 37, 135-151.
Ben Hmiden, O.; Rjiba, H.; Saadi, S. Competition through environmental CSR engagement and cost of equity capital. Financ. Res. Lett. 2022, 47, 102773.
Goss, A.; Roberts, G.S. The impact of corporate social responsibility on the cost of bank loans. J. Bank. Financ. 2011, 35, 1794-1810.
Ng, T.-H.; Lye, C.-T.; Chan, K.-H.; Lim, Y.-Z.; Lim, Y.-S. Sustainability in Asia: The roles of financial development in environmental, social and governance (ESG) performance. Soc. Indic. Res. 2020, 150, 17-44.
Albuquerque, R.; Koskinen, Y.; Zhang, C. Corporate social responsibility and firm risk: Theory and empirical evidence. Manag. Sci. 2019, 65, 4451-4469.
Lin, Y.; Fu, X.; Fu, X. Varieties in state capitalism and corporate innovation: Evidence from an emerging economy. J. Corp. Financ. 2021, 67, 101919.
Broadstock, D.C.; Chan, K.L.; Cheng, L.T.W.; Wang, X.W. The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China. Financ. Res. Lett. 2021, 38, 101716.
Garvey, G.T.; Kazdin, J.; Nash, J.; LaFond, R.; Safa, H. A pitfall in ethical investing: ESG disclosures reveal vulnerabilities, not virtues. Not Virtues (September 19, 2016) 2016.
Avetisyan, E.; Hockerts, K. The consolidation of the ESG rating industry as an enactment of institutional retrogression. Bus. Strat. and the Environ. 2017, 26, 316-330.
Entine, J. The myth of social investing: A critique of its practice and consequences for corporate social performance research. Organ. Environ. 2003, 16, 352-368.
Atan, R.; Razali, F.A.; Said, J.; Zainun, S. Environmental, social and governance (ESG) disclosure and its effect on firm’s performance: A comparative study. Inter.J. Econ. Manag. 2016, 10, 355-375.
Friede, G.; Busch, T.; Bassen, A. ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Sustain. Financ.Inves. 2015, 5, 210-233.
Feng, J.; Goodell, J.W.; Shen, D. ESG rating and stock price crash risk: Evidence from China. Finance Res. Lett.2022, 46, 102476.
Eliwa, Y.; Aboud, A.; Saleh, A. ESG practices and the cost of debt: Evidence from EU countries. Crit. Perspect. Accoun. 2021, 79, 102097.
Jang, G.-Y.; Kang, H.-G.; Lee, J.-Y.; Bae, K. ESG scores and the credit market. Sustainability 2020, 12, 3456.
Zhang, F.; Qin, X.; Liu, L. The interaction effect between ESG and green innovation and its impact on firm value from the perspective of information disclosure. Sustainability 2020, 12, 1866.
Montiel, I.; Cuervo-Cazurra, A.; Park, J.; Antolín-López, R.; Husted, B.W. Implementing the United Nations’ sustainable development goals in international business. J. Int. Bus. Stud. 2021, 52, 999-1030.

Point 2: Literature review

The authors may look into some sort of theoretical frameworks (eg stakeholder, legitimacy) to explain the motivation for firms to stimulate Corporate Green Innovation.

Response 2: Thanks for your comment. It is the important deficiencies in this paper, wherefore added the cite references from hypotheses, predictors, dependent outcome aspects as following :

First, we first added the cited references, such as:

Second, it enhances the legitimacy of green innovation investment. The enterprise ESG advantage’s most distinctive feature is its legitimacy. Environmental protection, stakeholder rights and interests protection, and upholding social obligations are not just what customers and investors expect from corporations but are also slowly becoming what regulatory agencies require of them (Lokuwaduge & Heenetigala, 2017).

On the contrary, if an enterprise violates the ESG concept, it may arise wide public concern quickly, impairing its enterprise image and brand reputation significantly; hence the legitimacy of enterprise operation will become more prominent (Li et al., 2021).

ESG advantages address the legal issue of green innovation, and endow enterprises with flexible green innovation strategies, which in turn improve the level of green innovation. What’s more, the general recognition of the legitimacy of the ESG concept lowers the transfer costs of the green technology, brand reputation and institutional mechanism obtained through ESG practice, facilitating to obtain green innovation resources and realizing the driving effect of ESG advantages on enterprise strategy (Abdul et al., 2021).

However, in the transition economy, non-market strategies (such as relationship networks) have an important impact on green innovation. One of the main reasons is that the resources and regulations on which green innovation depends are the key variables of innovation, while the acquisition of core resources relies on the combination of marketization and non-marketization strategies, which is determined by the institutional environment (Aguilera-Caracuel & Ortiz-de-Mandojana, 2013).

References:

Abdul Rahman, R., & Alsayegh, M. F. (2021). Determinants of corporate environment, social and governance (ESG) reporting among Asian firms. Journal of Risk and Financial Management, 14(4), 1-16

Aguilera-Caracuel, J., & Ortiz-de-Mandojana, N. (2013). Green innovation and financial performance: An institutional approach. Organization & Environment, 26(4), 365-385

Li, T., Wang, K., Sueyoshi, T., & Wang, D. D. (2021). ESG: Research progress and future prospects. Sustainability, 13(21), 1-28

Lokuwaduge, C. S. D. S., & Heenetigala, K. (2017). Integrating environmental, social and governance (ESG) disclosure for a sustainable development: An Australian study. Business Strategy and the Environment, 26(4), 438-450.

Second, We rewrite the moderating assumptions of the institutional environment.

Reference :

Dorobantu, S.; Kaul, A.; Zelner, B. Nonmarket strategy research through the lens of new institutional economics: An integrative review and future directions. Strateg. Manag. J. 2017, 38, 114-140.
Ciszewska-Mlinarič, M.; Trąpczyński, P. Foreign market adaptation and performance: The role of institutional distance and organizational capabilities. Sustainability 2019, 11, 1793.
Pfeffer, J.; Salancik, G.R. The External Control of Organizations: A Resource Dependence Perspective; Stanford University Press: New York, NY, USA, 2003.
Rathert, N. Strategies of legitimation: MNEs and the adoption of CSR in response to host-country institutions. J. Int. Bus. Stud. 2016, 47, 858–879.
Matthiesen, M.L.; Salzmann, A.J. Corporate social responsibility and firms’ cost of equity: How does culture matter? Cross. Cult. Strateg. Manag. 2017, 24, 105–124.
Colwell, S.R.; Joshi, A.W. Corporate ecological responsiveness: Antecedent effects of institutional pressure and top management commitment and their impact on organizational performance. Bus. Strateg. Environ. 2013, 22, 73–91
Chu, Z.; Xu, J.; Lai, F.; Collins, B.J. Institutional theory and environmental pressures: The moderating effect of market uncertainty on innovation and firm performance. IEEE Trans. Eng. Manag. 2018, 65, 392–403.
DiMaggio, P.J.; Powell, W.W. The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. Am. Sociol. Rev. 1983, 48, 147–160.
Abrahamson, E.; Rosenkopf, L. Institutional and competitive bandwagons: Using mathematical modeling as a tool to explore innovation diffusion. Acad. Manag. Rev. 1993, 18, 487–517.
Zhu, Q.; Geng, Y. Drivers and barriers of extended supply chain practices for energy saving and emission reduction among Chinese manufacturers. J. Clean. Prod. 2013, 40, 6–12.
Zhang, Y.; Wei, Y.; Zhou, G. Promoting firms’ energy-saving behavior: The role of institutional pressures, top management support and financial slack. Energy Policy 2018, 115, 230–238.
45。Yang, H.; Lee, M.; Park, S. The impact of institutional pressures on green supply chain management and firm performance: Top management roles and social capital. Sustainability 2017, 9, 764.
Rahdari, A.; Sheehy, B.; Khan, H.Z.; Braendle, U.; Rexhepi, G.; Sepasi, S. Exploring global retailers’ corporate social responsibility performance. Heliyon 2020, 6, E04644.

Point 3: Conclusion

Needs improvements. It is necessary highlights the need for a more informative discussion regarding the results.

Theoretical implications are lacking.

Response 3：

As the reviewer suggested, we added the part of conclusions from aspect of grovement ,and added the main contributions and research limitations,as following:

Discussion:

To make ESRs more sustainable, the government may potentially raise taxes and other penalties. Through punitive measures like tax increases, the government can also force companies with poor ESG performance to improve their performance. The gov-ernment should also actively promote an ESG disclosure system that is broadly applicable so that businesses, investors, and the general public will pay more attention to the ESG performance of businesses and support the transition to a green economy.The main contributions of this study are as follows. First, it responds to the debate surrounding the effectiveness of ESG in emerging markets by providing new insights into the relationship between corporate ESG ratings and green innovation and their mechanisms of action. Existing research on ESG ratings has focused on developed markets that have developed relatively mature concepts. For example, Chouaibi (2021) analyzes ESG practices in the UK and German systems to improve financial performance by benefiting from green innovation [57]. Meanwhile, Cohen (2020) reached a different conclusion and pointed out the opposite relationship between ESG scores and green innovation in the U.S. energy sector [58]. Existing studies are limited and focus on developed countries with relatively mature ESG systems. In contrast, emerging markets are still in their infancy due to significant institutional differences. The findings of this study help to answer whether ESG ratings contribute to the green transition and enrich the results related to ESG practices in developing countries. Second, this study further expands the influencing factors of green innovation beyond the mainstream research paradigm of government-level environ-mental regulations on green innovation, with special emphasis on third-party rating agencies, providing new perspectives and empirical support for the guiding role of ESG ratings on green innovation. Third, this study expands the scope of green innovation measurement to compensate for the existing literature's preference for green innovation in terms of quantity rather than quality. Drawing on detailed patent census data in China, this study uses green patent citations to measure the quality of green innovation, which is conducive to deriving more meaningful research questions, emphasizing objective data on green innovation patent applications, and improving their impact. Fourth, this study analyzes the moderating mechanism between ESG ratings and green innovation through the external institutional environment and internal organizational redundancy resources, deconstructs the internal logic, extends the research boundary, and provides a realistic reference for the promotion of ESG ratings by examining the heterogeneity in the Chinese context from multiple dimensions such as institutions, markets, and firms as emerging markets continue to develop.

Second, the findings of this paper are also limited in terms of the mechanisms that enhance corporate green innovation, which need to be explored and further tested. In terms of future research directions in terms of moderating mechanisms, although this study investigated the institutional environment and organizational redundancy re-sources as moderating factors, other factors such as political capital (Lin et al., 2015) , environmental ethics (El-Kassar & Singh, 2019), or top management's characteristics (Galbreath, 2019) may also influence the relationship between ESG ratings and corporate green innovation.What’s more, we will conduct a heterogeneity analysis concerning the discrepancies in diverse industries and property rights to reveal the impact level of ESG rating on corporate green innovation.

Reference :

Chouaibi, S.; Chouaibi, J.; Rossi, M. ESG and corporate financial performance: the mediating role of green innovation: UK common law versus Germany civil law. EuroMed Journal of Business 2021.
Cohen, L.; Gurun, U.G.; Nguyen, Q.H. The ESG-innovation disconnect: Evidence from green patenting; National Bureau of Economic Research: 2020.

Author Response File: Author Response.pdf

Reviewer 4 Report

The abstract need to be rewritten. The sentence that begins with “therefore” on line 11 is hard to understand. The sentence that starts on line 16 refers to previous findings. Is that a different paper?

The sentence that begins on line 47 is repeated twice. “These studies unquestionably contribute significantly to our understanding of the impact of ESG; These studies unquestionably contribute significantly to our understanding of the impact of ESG; yet, there is…”

Spelling mistakes are common. For instance, there is a spelling mistake on line 141.

What is the definition of “greatly differ from other companies” on line 202?

What are ST (*) listed companies? (line 203)

In Tables 2, 3 and 4 most of the control variables are insignificant. How do you explain this?

The definitions of the variables used in the estimations are not clear. An appendix needs to be added to explain the variables.

In Table 3, adding new variables changes the significance of Top1. What is the reason for that?

Author Response

Please see the attachment

Point 1: The abstract need to be rewritten. The sentence that begins with “therefore” on line 11 is hard to understand. The sentence that starts on line 16 refers to previous findings. Is that a different paper?

Response 1: As the reviewer suggested,we revised the part of abstract ,as following:

Green innovation serves as both a catalyst for businesses to pursue sustainable development and a crucial step in achieving green circular economic development. Green innovation is the practice of organizations considering Environmental, Social, and Governance (ESG) aspects and the ESG advantages resulting from this process may become a driving force for enterprises to undergo a green transformation. Therefore, based on the data related to Chinese A-share listed companies from 2009 to 2020, we study the relationship between ESG rating performance and corporate green innovation and its boundary mechanism. The results show that ESG rating can improve the green innovation level of listed enterprises, and the relationship between ESG ratings and green innovation is also found to be strengthened by the institutional environment and organizational redundancy resources. This study previously confirmed the positive impact of enterprise ESG rating on its green innovation, which has important implications for realizing the effective com-bination of ESG advantages and green innovation, promoting the construction of ecological civi-lization and realizing the concept of a community with a shared future for mankind.

Point 2: The sentence that begins on line 47 is repeated twice. “These studies unquestionably contribute significantly to our understanding of the impact of ESG; These studies unquestionably contribute significantly to our understanding of the impact of ESG; yet, there is…”Spelling mistakes are common. For instance, there is a spelling mistake on line 141.

Response 2: Thanks for your comment. It is the important deficiencies in this paper, wherefore we revised the repeated mistakes and spelling mistakes.

Point 3: What is the definition of “greatly differ from other companies” on line 202?

Response 3: “greatly differ from other companies”：except ST companies，it means formal companies

Point 4: What are ST (*) listed companies? (line 203)

Response 4: ST（Special Treatment）refers to the stocks of domestic listed companies that are subject to special treatment. Domestic listed companies operating at a loss for two consecutive years are also subject to delisting risk warnings.

Point 5 In Tables 2, 3 and 4 most of the control variables are insignificant. How do you explain this? The definitions of the variables used in the estimations are not clear. An appendix needs to be added to explain the variables.

In Table 3, adding new variables changes the significance of Top1. What is the reason for that?

Response 5: As the reviewer suggested,we revised the part of empirical analysis, regressions using the fixed-effects model showed a significant increase in the number of significant control variables compared to the previous, as following:

Table 2. The regression results of ESG rating on corporate green innovation.

	(1)	(2)	(3)
	GRInno	GRInva	GRUma
ESG	0.019***	0.017***	0.011***
	(3.789)	(4.247)	(2.968)
Size	0.046***	0.043***	0.026***
	(4.405)	(4.968)	(3.158)
Age	0.118*	0.116**	0.055
	(1.806)	(2.153)	(1.071)
Top1	-0.075	-0.012	-0.070
	(-1.199)	(-0.237)	(-1.438)
Roa	0.519***	0.306***	0.380***
	(5.679)	(4.063)	(5.338)
Lev	0.121***	0.101***	0.068**
	(2.938)	(2.988)	(2.139)
Board	0.015	0.016	-0.018
	(0.327)	(0.406)	(-0.490)
Inde	-0.069	-0.037	-0.070
	(-0.540)	(-0.350)	(-0.701)
Dualiy	0.002	-0.005	0.002
	(0.160)	(-0.430)	(0.176)
Constant	-1.000***	-1.081***	-0.433*
	(-3.247)	(-4.262)	(-1.804)
Industry FE	Yes	Yes	Yes
Year FE	Yes	Yes	Yes
N	21616	21616	21616
Adj.R2	0.692	0.673	0.643

Table 3. The moderating effect of institutional environment and organizational redundant resources.

	(1)	(2)	(3)
	GRInno	GRInno	GRInno
ESG	0.019***	0.018***	0.019***
	(3.939)	(3.647)	(3.799)
InEnv	-0.004		-0.004
	(-0.360)		(-0.390)
ESG×InEnv	0.009***		0.009***
	(3.819)		(3.790)
OrRes		0.001	0.001
		(0.449)	(0.461)
ESG×OrRes		0.067**	0.066**
		(2.140)	(2.092)
Size	0.046***	0.045***	0.046***
	(4.447)	(4.337)	(4.380)
Age	0.113*	0.116*	0.112*
	(1.732)	(1.765)	(1.695)
Top1	-0.079	-0.075	-0.079
	(-1.265)	(-1.198)	(-1.264)
Roa	0.520***	0.518***	0.519***
	(5.690)	(5.667)	(5.679)
Lev	0.118***	0.129***	0.126***
	(2.881)	(2.923)	(2.875)
Board	0.014	0.017	0.015
	(0.289)	(0.365)	(0.327)
Inde	-0.058	-0.069	-0.058
	(-0.452)	(-0.537)	(-0.450)
Dualiy	0.002	0.002	0.002
	(0.122)	(0.157)	(0.119)
Constant	-1.261***	-1.265***	-1.248***
	(-3.004)	(-2.993)	(-2.958)
Industry FE	Yes	Yes	Yes
Year FE	Yes	Yes	Yes
N	21616	21616	21616
Adj.R2	0.692	0.692	0.692

Table 4. Substitute variable for corporate green innovation.

	(1)	(2)	(3)	(4)
	GRInva	GRUma	GRInva	GRUma
ESG	0.018***	0.012***	0.017***	0.011***
	(4.421)	(3.097)	(4.118)	(2.796)
InEnv	0.002	-0.002
	(0.189)	(-0.191)
ESG×InEnv	0.009***	0.006***
	(4.315)	(3.248)
OrRes			0.004	0.002
			(1.491)	(0.666)
ESG×OrRes			0.065***	0.064***
			(2.653)	(2.605)
Size	0.043***	0.026***	0.042***	0.025***
	(5.009)	(3.192)	(4.887)	(3.073)
Age	0.111**	0.051	0.123**	0.054
	(2.068)	(1.007)	(2.272)	(1.045)
Top1	-0.016	-0.073	-0.015	-0.070
	(-0.305)	(-1.493)	(-0.286)	(-1.442)
Roa	0.306***	0.381***	0.308***	0.380***
	(4.071)	(5.346)	(4.096)	(5.328)
Lev	0.098***	0.067**	0.121***	0.078**
	(2.907)	(2.087)	(3.336)	(2.260)
Board	0.014	-0.019	0.017	-0.016
	(0.367)	(-0.522)	(0.436)	(-0.442)
Inde	-0.026	-0.063	-0.034	-0.070
	(-0.244)	(-0.625)	(-0.319)	(-0.695)
Dualiy	-0.005	0.001	-0.005	0.002
	(-0.478)	(0.143)	(-0.480)	(0.168)
Constant	-1.004***	-0.383	-1.027***	-0.376
	(-3.953)	(-1.593)	(-4.029)	(-1.559)
Industry FE	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes
N	21616	21616	21616	21616
Adj.R2	0.674	0.644	0.673	0.644

Appendix 1 The descriptions of the variables

	Variables	Description
Dependent Variable	Green innovation.	we applied the natural logarithm of the sum of the total number of applications of green invention patent and utility patent plus 1 to measure corporate green innovation (GRInno). We classified the application of green invention patent into exploratory green innovation (GRInva) and the application of utility patent into exploitative green innovation (GRUma).
Independent Variable	ESG rating	All listed companies are rated by the China Securities ESG rating score
Moderation Variables	Institutional Environment	the degree of marketization is often used as its proxy variable
Moderation Variables	Organizational Redundant Resources	The cash ratio will be adopted to determine the organizational redundant resources given its importance in firm green innovation via referring to the research of Kim and Bettis (2014). Specifically, cash ratio = (Cash + marketable securities)/current liabilities)
Control Variables	Size	The natural logarithm of total assets
	Age	the number of years that the firm has been established.
	Top1	Percentage of shares held by the largest shareholder
	ROA	Net profit divided by average total assets
	Lev	The total liabilities are divided by the total assets
	Board	The natural logarithm of the number of directors on the board
	Inde	The number of independent directors divided by the total number of all directors.
	Dualiy	Whether the chairman and the general manager are the same person

Author Response File: Author Response.pdf

Round 2

Reviewer 1 Report

The authors have well responded to most of my comments. Clearly, it is data-driven using statistical tests in this area (ESG). I have several suggestions for them:

1. Appendix 1 & 2 are important tables. They should be put in the text.

2. For Appendix 1, what are the differences between control variables and moderators?

3. For Appendix 2, the presentation is very poor. To make a clear comparison, at least, independent variable(s), outcome(s), moderators, mediators, etc., should be illustrated to highlight research contributions.

Author Response

Please see the attachment.

Point 1: Appendix 1 & 2 are important tables. They should be put in the text.

Response 1: Thanks for your comment. It is the important deficiencies in this research. We have been putted appendix 1 & 2 in the text as following :

Point 2: For Appendix 1, what are the differences between control variables and moderators?

Response 2: Thanks for your comment. It is the important deficiencies in this research.

In summary, the two types of variables (control variables and moderators variables) are distinguished: moderating variables emphasize contextual mechanisms and are boundary conditions of the relationship between esg and corporate green innovation, and in this paper, external institutional environment and internal organizational redundant resources are selected as moderating variables, respectively.

The control variables mainly affect the elements of the dependent variable for control, and the control variables in this paper specifically include: corporate governance structure variables and financial variables.

Moderator variables:"In general terms, a moderator is a qualitative (e.g., sex, race, class) or quantitative (e.g., level of reward) variable that affects the direction and/or strength of the relation between an independent or predictor variable and a dependent or criterion variable. Specifically within a correlational analysis framework, a moderator is a third variable that affects the zero-order correlation between two other variables.

Control variables: These are factors that affect the dependent variable that the researcher does not want to see and whose presence interferes with the researcher's analysis of the effect of the independent variable on the dependent variable. Control variables, also known as "additional variables," are factors that must be controlled for or excluded by statistical methods.

Point 3: For Appendix 2, the presentation is very poor. To make a clear comparison, at least, independent variable(s), outcome(s), moderators, mediators, etc., should be illustrated to highlight research contributions.

Response 3: Thanks for your comment. It is the important deficiencies in this research.

This section presents a list of empirical studies that use GI variables and ESG consequence variables in their models (Table 1). The list provides the variables most often associated with GI and ESG and suggests where to find theoretical or empirical gaps in this research. Nevertheless, a large proportion of the most cited articles in the field concern theoretical works aimed at conceptualizing and developing markers. In this research, the empirical use of GI and ESG variables has been carried out in response to literature studies. This may be because GI and ESG research is still in its infancy, or because there are different and interchangeable terms to refer to the same topic. Table 1 provides the names of authors, journal titles, and variables used in each study. We assess and distinguish between types of variables to identify the roles associated with GI: GI drivers (modeling GI as dependent variables), GI outcomes (modeling GI as independent variables), and moderating or mediating variables. In addition, the variables and associated impact mechanisms of ESG on the strategic consequences of the firm are also assessed.

Table 1. Selected prior empirical research on GI and ESG.

Author	Journal titles	Drivers of GI	Outcomes of GI	Moderating Variables	Mediating Variables
Research literature on the outcomes of green innovation (GI)
Xu et al. (2021)[25]	Energy Economics		carbon emission performance		energy consumption structure effect, industrial structure effect, urbanization effect, and foreign direct investment (FDI) effect
Huang et al. (2021)[26]	Technology in Society		sustainable development		marketization, local government competition
Lin et al. (2021)[27]	Technological Forecasting and Social Change		brand value		marketing capability and R&D intensity
Javeed et al. (2022)[28]	International Journal of Environmental Research and Public Health		Corporate Financing	Corporate Social Responsibility and Gender Diversity
Aguilera-Caracuel & Ortiz-de-Mandojana (2013)[29]	Organization and Environmenta		Financial performance	national institutional conditions
Research literature on influencing factors of green innovation(GI)
Yuan & Cao (2022)[30]	Technology in Society	corporate social responsibility practices			green dynamic capability
Chu et al. (2018)[31]	The International Journal of Logistics Management	Customer pressure		organizational culture
Shahzad et al. (2021)[32]	Business Strategy and the Environment	knowledge management process		sustainable development practices
Zhou et al. (2021)[33]	Resources Policy	environmental legitimacy		green absorptive capacity	Senior management cognition and green strategic orientation
Xia et al. (2022)[34]	Energy Policy	Government subsidy		board diversity and independent directors
Fang et al. (2021)[35]	Economic Analysis and Policy	Government’s awareness of Environmental protection			information disclosure
Xiang et al. (2022)[36]	International Review of Economics & Finance	Internal and External financing			debt financing and equity financing.
Jiang & Bai (2022)[37]	Technology in Society	institutional investors' site visits		Firm size	CEO duality or low-competitive market environment.
Tan et al. (2022)[38]	Resources Policy	green credit policy		financing constraint or the fiercer the industrial competition and degree of marketization
Research on the outcomes of ESG
Author	Journal	Outcomes of ESG		Moderating Variables	Mediating Variables
Gillan et al. (2021)[39]	Journal of Corporate Finance	Corporate Social Responsibility		Institutional investor ownership
Bofinger et al. (2022)[40]	Journal of Banking & Finance	Market efficiency		market sentiment towards sustainability
Nekhili et al. (2021)[41]	Corporate Governance: An International Review	financial performance		employee board representation
Chen & Xie (2022)[42]	International Review of Financial Analysis	financial performance		ESG investors
Tang (2022)[43]	Sustainability	corporate Innovation			Financial Constraints and Agency Cost
Zhou, Liu, & Luo (2022)[44]		company market value			financial performance

In studies on corporate green innovation, "consequential performance impacts" and "drivers" are the most common categories. On the one hand, the independent variables as drivers of green innovation in existing studies include corporate social responsibility practices, customer pressure, knowledge management process, environmental legitimacy, government subsidy, government's awareness of environmental protection, internal and external financing, institutional investors' site visits and green credit policy, etc. On the other hand, the main strategic consequences of green innovation include carbon emission performance[25], sustainable development, [26] brand value[27], corporate financing[28], and financial performance[29]. In terms of moderating mechanism variables mainly in-clude organizational culture[31], sustainable development practices[32], green absorptive capacity[33], board diversity and independent directors, etc[34]., which are mainly discussed from the perspective of executive characteristics and organizational capacity. The Table 1 provides a deeper and more accurate understanding of which variables are effective drivers, outcomes, and impact mechanisms of GI. In addition, in terms of ESG consequences, the main focus is on CSR[39], Market efficiency[40], financial performance[41], Innovation and market value, and the moderating mechanisms mainly include board representation, institutional investor ownership and market sentiment, etc.

In summary, according to Table 1, there is a lack of research on the relationship between ESG and corporate green innovation, whether it is the consequences of ESG strategy or the influencing factors of green innovation, and especially in terms of the regulating mechanisms, the internal mechanisms primarily focus on executive behavior and individual capabilities, with less consideration given to the regulatory mechanisms. External research focuses primarily on market competition and less on the legitimacy of the institutional environment, and research has shown that companies that effectively respond to institutional pressures are more likely to obtain the external resources required for sustainable development by achieving social legitimacy. As a result, based on the ESG research perspective, this paper systematically integrates the internal and external regulatory mechanism variables of previous studies, combines the institutional theory and resource-based perspectives, and introduces two regulatory variables, external institutional environment and internal organization redundant resources, to examine the boundary conditions of ESG and corporate green innovation, rewarding and extending the existing literature.

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Can ESG Ratings Stimulate Corporate Green Innovation? Evidence from China

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