**1. Introduction**

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, as well as frequent political resistance to national response actions [2], have led to differing views on maximizing shareholders' interests [3]. 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 coordination of international organizations. Investors and government policies are presently highly interested in ESG. The impact of COVID-19 is increasing 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 [3]. Despite the late start of China's ESG growth, all facets of society have given it more attention. ESG policies and investments have been greatly improved, particularly since Chinese Chairman Xi proposed the UN General Assembly's "2060 carbon neutrality" objective.

A key indicator of corporate sustainable development and environmental, social, and corporate governance (ESG) is the expansion and enrichment of the socially responsible investing (SRI) concept [4,5]. A growing number of businesses now accept the ratings provided by ESG rating firms as the green concept gains traction. This indicates that academic attention is now heavily focused on how ESG ratings affect company strategy [6]. Existing

**Citation:** Liu, H.; Lyu, C. Can ESG Ratings Stimulate Corporate Green Innovation? Evidence from China. *Sustainability* **2022**, *14*, 12516. https://doi.org/10.3390/su141912516

Academic Editors: Akrum Helfaya and Ahmed Aboud

Received: 24 August 2022 Accepted: 26 September 2022 Published: 30 September 2022

**Copyright:** © 2022 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/).

research on the effectiveness of ESG ratings is unfortunately frequently disputed. According to academics who support ESG ratings, such evaluations objectively and effectively gauge a company's ESG efforts through its competitive advantage, social reputation, and operating performance; give stakeholders access to resources [7]; reduce regulatory and reputational risks; and provide stakeholders with comprehensive and comparable data to correct information asymmetries [8]. A company's better ESG performance has lower equity capital costs [9] and loan costs [10]. ESG should be a key instrument for improving corporate finance in a negative loan market [11]. Moreover, ESG can help firms to hedge risks [12], build trust against shocks in a crisis [13], and improve corporate performance and longterm value [14]. In contrast, other scholars believe 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, "Dual externalities" based on green innovation highlight green technology [22]. At the macro level, green innovation technology's external spillover effect lowers costs, improves environmental protection, and achieves high-quality economic development; at the micro level, businesses reshape their development models, introduce new ideas for reducing emissions and preserving energy, and encourage the green transformation of enterprises. As a result, we are as yet unable to foresee how ESG would affect corporate strategic decision making about green innovation and the aforementioned relationship's mechanisms [23]. In view of the actions of organizations and the significance of their participation in sustainable development activities, this research examines the impact of ESG ratings on the green innovation strategies of businesses to make up for deficiencies in pertinent domains [24].

As a result, the theoretical impact and boundary mechanism of ESG ratings on companies green innovation are considered to be the primary focus of this article. The non-financial companies listed on the A-share market in China from 2009 to 2020 are the research subjects of this paper, which also describes the complete green innovation activities of the companies in conjunction with data from the World Intellectual Property Organization and authoritative green innovation patents. It also measures the performance level of ESG using data from ESG ratings and emphasizes the influence of ESG ratings on the level of green innovation of the companies. This research also illustrates a potential border mechanism from the redundant organizational resources and institutional environment perspectives. The following conclusions are obtained: (i) ESG ratings have significantly promoted green innovation; (ii) the completeness of the institutional environment and the abundance of redundant organizational resources have strengthened the positive impact of ESG ratings on corporate green innovation.

The remainder of the paper is organized as follows: Section 2 proposes the relevant theories and hypotheses; Section 3 describes the data and methodology; Section 4 provides empirical findings; Section 5 provides the study's conclusions.

#### **2. Literature Review and Hypothesis Development**

#### *2.1. Literature Review*

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 was carried out in response to the 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 the authors, journal titles, and variables used in each study. We assessed and distinguished between the 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 firms were also assessed.


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


#### **Table 1.** *Cont.*

In studies on corporate green innovation, "consequential performance impacts" and "drivers" were the most common categories. On the one hand, the independent variables as drivers of green innovation in existing studies included corporate social responsibility practices [30], customer pressure [31], knowledge management processes [32], environmental legitimacy [33], government subsidy [34], government's awareness of environmental protection [35], internal and external financing [36], institutional investors' site visits [37], green credit policy [38], etc. On the other hand, the main strategic consequences of green innovation included carbon emission performance [25], sustainable development [26], brand value [27], corporate financing [28], and financial performance [29]. The moderating mechanism variables mainly included organizational culture [31], sustainable development practices [32], green absorptive capacity [33], board diversity and independent directors, etc. [34], which were mainly discussed from the perspective of executive characteristics and organizational capacity. Table 1 provides a deeper and more accurate understanding of the variables that were the effective drivers, outcomes, and impact mechanisms of GI. In addition, in terms of ESG consequences, the main focus was on CSR [39], market efficiency [40], financial performance [41], innovation [43], and market value [44], and the moderating mechanisms mainly included board representation, institutional investor ownership, and market sentiment.

In summary, according to Table 1, there is a lack of research on the relationship between ESG and corporate green innovation, whether due to the consequences of the ESG strategy or the influencing factors of green innovation. In particular, in terms of the moderating mechanisms, the internal mechanisms primarily focused on executive characteristics and organizational capacity, with less consideration given to the regulatory mechanisms. The external research focused 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, from the ESG research perspective, this paper systematically integrated the internal and

external moderate mechanism variables of previous studies, combined institutional theory and resource-based perspectives, and introduced two moderate variables, the external institutional environment and internal redundant organizational resources, to examine the boundary conditions of ESG and corporate green innovation, rewarding and extending the existing literature.
