SSRN Id4519204

Driving Sustainable Development: The Impact of Artificial Intelligence on Environmental,
Social, And Governance (ESG) Performance
Shuangyan Li1, Muhammad Waleed Younas*1, R.M. Ammar Zahid2, Umer Sahil Maqsood1
1
School of Economics and Finance, Xi’an Jiao tong University, Xi’an, Shaanxi, China
2
School of Accounting, Yunnan Technology and Business University, Yunnan, P. R China
ABSTRACT
In the midst of the ongoing digital revolution, businesses are increasingly embracing artificial
intelligence (AI) to optimize their operations. This study aims to explore the adoption role of AI
in environmental, social, and governance (ESG) performance. Further, it investigates this
relationship with respect to different ownerships i.e., State owned enterprises (SOEs) vs non-State-
owned enterprises (non-SOEs) and central-SOEs vs local-SOEs. By analyzing a sample of Chinese
A-share listed companies from 2010-2020, findings reveal that the adoption of AI significantly
improves firm ESG performance, underscoring the importance of technological advancements.
Furthermore, the impact of AIA on ESG performance is more pronounced in SOEs compared to
non-SOEs and in central-SOEs than local-SOEs. These findings suggest a strong involvement of
the Chinese government in driving the digital economy and its role in ESG initiatives. Finally,
study findings are robust and consistent across multiple statistical horizons, including 2SLS, PSM,
SysGMM, and instrumental variable analysis.
Keywords: Artificial intelligence, ESG, Environmental, Social, Governance, Ownership, types

of SOEs
Electronic copy available at: https://ssrn.com/abstract=4519204

1. Introduction
The Artificial intelligence adoption (AIA) is a remarkable innovation which reshaping our world
(Yu et al., 2023). It brought fundamental transformation in various domains of life and unlocked
limitless possibilities. For instance, AIA has revolutionized teaching and learning methods, making
education more accessible and personalized (Zhang & Aslan, 2021). Further, at corporate level it
enhanced management control, empowering organizations to make informed decisions and
optimize their operations (Berente et al., 2021). This widespread adoption of artificial intelligence
(AI) signifies its growing importance and potential to shape the future remarkably. The figure 1
depicts that AIA have been consistent and improving progressively over the years.
Adoption of Artificial Intelligence in firm operation over the years

0.6
0.5
0.4
0.3
0.2
0.1
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
AIA SOEs Non-SOEs Linear (Non-SOEs)
Figure 1 Provides the mean Value of AIA in Total Firms, SOEs, and Non-SOEs"
Existing studies examining the impact of AI technologies on firm performance which can be
categorized into two main strands. The first strand focuses on the tangible benefits of AIA, where
firms invest in utilizing AIA applications such as autonomous vehicles and predictive maintenance
to improve their output and operational efficiency (Brynjolfsson et al., 2018). The second strand
examines the intangible benefits of AIA, exploring how AI-based techniques contribute to a firm's
economic growth (Aghion et al., 2018), productivity (Czarnitzki et al., 2023), firms financial
performance (Bosse et al., 2023), and innovation (Bahoo et al., 2023). These studies provide
insights into how enterprises adapt the digital era, leading to significant changes in their
operational structure and financial performance. However, there are several environmental, social
and governance (ESG) issues that these companies need to address. These include weak
environmental awareness, insufficient attention to employee rights and conditions, and imperfect
product safety assurance systems (Wang et al., 2022).

The pursuit of ESG initiatives, enterprises, governments, and scholars have recently explored ways
to strike a balance between ESG engagement and profitability (Alareeni & Hamdan, 2020;
Broadstock et al., 2021). Under the digital economy era, the integration of AI has reverberated
enterprises, transforming their behaviors, manners, and organizational structures, thereby
influencing various firm aspects such as innovation, productivity, performance, and management
dynamics (Bahoo et al., 2023; Bosse et al., 2023; Czarnitzki et al., 2023). Hence, it is plausible
that a firm's adoption of AI intricately impacts its ESG performance.
The relationship between AIA and ESG initiatives can be better explained through several key
aspects: Firstly, AIA provide valuable insights into market demand, technological advancements,
and opportunities for ESG practices. This, in turn, motivates businesses to strengthen their
sustainability-related initiatives and explore novel avenues for achieving sustainable growth
(Macpherson et al., 2021). Moreover, AIA transforms the landscape of innovation within firms,
enabling them to innovate independently and collaborate more effectively (Bahoo et al., 2023).
This shift in mindset and practices fosters greater participation in ESG initiatives, as companies
become more agile and adaptable to address environmental and social challenges. Furthermore,
AIA plays a vital role in optimizing companies' financing costs, enabling efficient allocation of
financial resources and investment in promising ESG projects (Macpherson et al., 2021). With
better financial management facilitated by AIA, companies can pursue ESG goals while
maintaining profitability.
Additionally, the integration of AIA brings about a powerful synergy impact and spotlight effect,
leading to an increase in a company's environmental responsibility. In the current low-carbon era,
enterprises are increasingly willing to embrace environmental and social responsibility in
alignment with government legislation (Wen et al., 2023; Zou et al., 2023). Notably, AIA-driven
expands firms' industrial chains, market sizes, and company structures, as evident in the research
conducted by Ferreira et al. (2019). This expansion opens up new opportunities for companies to
integrate ESG practices into their operations and supply chains, leading to a more sustainable and
socially responsible approach to business.
In contrast to previous studies that examined the impact of digital transformation (DT) on ESG
(Wang et al., 2023). Our study focused on AIA to investigate its influence on ESG practices and
differentiating it from Wang et al. (2023). DT and AI are two distinct but related concepts that play
a significant role in shaping modern businesses. DT is a process that modernizes and optimizes

company processes, improving data management, and fostering customer focus (Wu & Li, 2023).
In contrast, AI empowers machines to perform human-like cognitive tasks, such as natural
language processing, image and speech recognition, decision-making, and problem-solving
(Bahoo et al., 2023). Further, technologies like cloud computing, IoT, big data analytics, mobile
apps, and social media platforms, are involved in DT, whereas AI involves the development and
deployment of machine learning, neural networks, natural language processing, and computer
vision technologies These AI capabilities enable machines to process information and execute
tasks with human-like cognitive abilities. Both DT and AI play pivotal roles in enhancing different
aspects of business, with the former impacting consumer interaction, supply chain management,
and data-driven decision-making, while the latter drives intelligent automation and data-driven
insights.
To empirically examine the relationship between AIA and ESG, we used a 4348 firm-year
observation of Chinese A-share listed firm sample from 2010 to 2020. Our findings prove that
integrating AIA into company operations significantly positively affects ESG performance. This
effect is particularly pronounced in state-owned enterprises (SOEs) compared to non-state-owned
enterprises (non-SOEs). This finding supports the research conducted by Kowalski et al. (2013),
which highlights that State-Owned Enterprises (SOEs) tend to exhibit a risk-taking attitude and a
greater openness to innovation. As a result, these SOEs demonstrate higher levels of innovation,
political stability, and profit maximization, as reported by Choe and Yin (2000). In contrast, non-
SOEs face challenges in terms of profitability and innovation due to limited political connections,
higher information asymmetry, and managerial compensation structures (Dai & Cheng, 2015).
Furthermore, our analysis reveals that adopting AIA is more prevalent in central SOEs than in local
SOEs. Moreover, we conducted several robustness tests, such as change regression, two-stage least
squares (2SLS), propensity score matching (PSM), and system Generalized Method of Moments
(sysGMM), to address any potential endogeneity concerns related to our main results.
Our research makes significant contributions to the existing literature in several ways. Firstly,
unlike previous studies that have mainly focused on the profit impact of AIA on overall firm
performance, innovation, and productivity, our study takes a different approach. We delve into the
social perspective and investigate how AIA impacts ESG performance at firm level. By exploring
this specific dimension, we establish a crucial link between AI adoption and corporate ESG
practices, revealing the social and economic implications of integrating AI into businesses. As a

result, our study findings enhance the theory of corporate governance by providing valuable
insights into how AI influences companies' ESG practices.
Secondly, we aim to understand the factors that influence the impact of AIA on ESG. We
investigate whether this impact remains consistent across firms with various fundamental
circumstances. Specifically, we explore how different state ownership and types of ownership may
moderate the effect of AIA on ESG performance. By doing so, we gain a better understanding of
which kinds of firms can effectively leverage AIA to enhance their ESG practices. Specifically
comparing SOEs to non-SOEs and local SOEs to central SOEs. SOEs have unique advantages
compared to non-SOEs when it comes to fostering inter-firm collaborations, especially in the area
of innovation and production. One of the main reasons is that state ownership in various
corporations enhances the network of relationships between firms, creating a conducive
environment for collaboration and knowledge sharing. Considering the profit orientation of non-
SOEs private controlling shareholders, they often show less interest in and may even avoid ESG
practices, suggesting that private enterprises diminish the impact of AIA on ESG.
Lastly, our research offers valuable insights for policymakers, managers, and stakeholders to shape
strategies and interventions concerning the potential benefits of adopting AI for sustainable and
eco-friendly business practices. By incorporating these insights into their approaches,
policymakers can establish a supportive policy environment, managers can make well-informed
investment choices, and stakeholders can actively support organizations leading AI-driven
sustainable innovation. Ultimately, these actions can contribute to the progress of environmentally
friendly practices, fostering a more sustainable future for all.
The remainder of the paper is structured as follows. Section 2 provides background information
on AIA. Section 3 presents a comprehensive review of the relevant literature and outlines the
development of our hypotheses. Section 4 describes the data used in our study and explains the
variables included in our model. The empirical analysis and the results are presented in Section 5,
along with various robustness checks. Finally, Section 6 discusses the conclusions drawn from our
findings.
2. Theoretical Background
2.1 Artificial intelligence background
Artificial intelligence (AI) has a vast array of applications in business, and its incorporation has
reshaped many facets of their operations. Firstly, this system process and analyze vast amounts of

data, revealing insights and patterns that drive strategic decision-making (Kar & Kushwaha, 2021).
Which allows businesses to make more precise predictions, optimize operations, and recognize
new opportunities (de Keijzer et al., 2021). Further it uses algorithms to evaluate historical data
and produce predictions and projections help organizations better anticipate future trends, demand,
and market circumstances (de Keijzer et al., 2021). Secondly, chatbots and virtual assistants that
are driven by AI deliver individualized and effective customer service by quickly responding to
questions and addressing problems in real-time. In addition to analyzing customer data to provide
personalized recommendations, in turn boosts customer engagement and satisfaction (Bag et al.,
2022). Additionally, the transformative power of AI plays a crucial role in driving sustainable
development (Goralski & Tan, 2020), within the business and contributing to society's progress.
Sustainable development can be achieved by incorporating environmental, social, and governance
(ESG) concepts and practices. Managers lacking advanced technology may encounter challenges
in gathering and analyzing sufficient information for identifying new opportunities or resolving
firm ESG related issues AI adoption is capable of autonomous learning and having decision-
making power, and operating independently without direct human involvement (Agrawal et al.,
2019), as humans and AIA exhibit distinct approaches to processing information and acquiring
domain expertise. Moreover, this process vast amounts of information at greater speed and
accuracy. On the other hand, humans rely on information processing shortcuts, which may lead to
occasional errors or biases. However, this human characteristic also allows them to adapt flexibly
to scarce or intricate information environments (Raisch & Krakowski, 2021). Information
processing is crucial in the idea-generation phase of firm ESG related decision (Schramade, 2016).
This information system improved by the adoption of AI. Better information enables businesses to
collect comprehensive and accurate data on ESG factors (Delgado-Ceballos et al., 2023), analyze
and evaluate the data to derive meaningful insights, and identify risks and opportunities. Moreover,
improved information processing also facilitates better stakeholder engagement by fostering
transparency and trust through clear and timely reporting on ESG performance. it helps in
monitoring and reporting ESG performance accurately, ensuring accountability and alignment with
stakeholder expectations (Lu et al., 2023).
After discussing all these, we move toward the development of our hypothesis.
3. Literature review and hypothesis development
3.1 Artificial Intelligence adoption and ESG Performance

As digital technologies (AIA in our case) have progressed, their integration into business processes
has significantly changed the firm operations, production and management level environment, it
is widely seen as an efficient way to drive high-quality, sustainable growth. (Ebert & Duarte, 2018;
Javaid et al., 2022). While sustainable growth can be achieved through its commitment to strong
ESG initiatives (N. Wang et al., 2022). The nature of ESG investments is inherently riskier
regarding potential knowledge spillovers and financial returns (Kilic et al., 2022), because it
requires more capital investment and has greater external impacts than traditional innovation
activities (Cornell, 2021). To mitigate the external impacts and how AIA can enhance the ESG
performance, we check the relation between AIA and ESG through various theoretical
perspectives.
Firstly, AIA contributes to a reduction in the costs associated with principal-agent issues within
businesses (Feldstein, 2019), which, in turn, impacts the ESG performance of corporations
differently. According to the principal–agent theory, the separation of ownership and control
creates a situation where shareholders and managers have conflicting interests (Jensen &
Meckling, 1976). Managers are unable to mitigate risks by diversifying their investments across
different businesses. Consequently, managers may prioritize short-term gains over the long-term
development of the organization, leading to short-sighted behavior while the business is in
operation (Boubaker et al., 2016). While ESG's long-term focus on environmental protection,
governance and socially responsible investing leads to a cyclical and lagged effect on business
performance. Therefore, managers who prioritize their own earnings will be reluctant to make ESG
investments. As for as firms engage in digital transformation with the help of AIA, the flow of
information inside the firm becomes more streamlined (De la Peña & Granados, 2023), this
improved information disclosure process promotes greater openness and transparency in
managerial decision-making. Consequently, the challenges and costs associated with concealing
self-interest actions increase, thereby effectively mitigating the principal-agent conflict between
managers and shareholders (Müller & Turner, 2005; Zhou & Li, 2023). Moreover, AIA ensures
that managerial decision-making is based on a multitude of quantitative analysis results, reducing
discretionary power and limiting opportunistic behavior. This enables managers to focus on long-
term corporate development and enhance ESG performance.
Secondly, AIA helps firms gain competitive advantages and improve risk-taking practices, which
improves ESG performance. Investing in ESG practices poses a short-term risk to a firm's current

operating profits (McWilliams & Siegel, 2001; Zhang et al., 2022), as these initiatives may reduce
profitability and competitiveness in the current period. Therefore, managers may choose to avoid
or delay adopting ESG practices, aligning with the principles of the RBV theory, the AIA as a
significant variety of valuable resources, which prioritizes building and sustaining competitive
advantage for the firm's long-term success (Giustiziero et al., 2023; Lozano et al., 2015). Specially,
AIA assists bridge the "digital divide" between divisions, improve collaboration, and boost
resource allocation, which can stabilize corporate finances (Günther et al., 2017). Additionally,
based on the RBV theory, AIA is pivotal in fostering growth and generating value, surpassing other
resources in sustainable competitive advantage. One key aspect is AIA ability to empower firms
with valuable insights, including market trends, technological advancements, and ESG-related
opportunities. By leveraging this information edge, enterprises are motivated to enhance their ESG
initiatives, as they can make well-informed decisions and stay ahead in a dynamic business
environment. This strategic utilization of AIA enables firms to create long-term value and thrive
in their respective industries (Helfat et al., 2023). Therefore, these changes drive and motivate
firms to adopt ESG initiatives.
Moreover, AIA plays a crucial role in reshaping the innovation paradigm within firms. It enhances
their independent innovation capabilities and fosters a culture of open and collaborative
innovation, and AIA serves as a catalyst for promoting a more sustainable and socially responsible
business environment (Bahoo et al., 2023; Li & Chan, 2019). These shifts in the innovation
approach, in turn, drive firms' engagement in ESG initiatives. AIA, a dynamic technological
capability (Liang et al., 2022), significantly impacts ESG. This is because AIA can capture data,
identify patterns in business operations, learn from business indicators, and analyze data logically
(Mikalef & Gupta, 2021). With these capabilities, AIA enhances ESG practices and generates
valuable insights for sustainable decision-making. Hence, incorporating AIA allows enterprises to
unlock improved pathways and methods for innovation by analyzing extensive data patterns
associated with innovation activities (Bahoo et al., 2023). It empowers firms to develop
independent capabilities that optimize their innovation processes' efficiency and effectiveness
while mitigating costs and risks. By utilizing the power of AIA, businesses can enhance their
innovation endeavours and achieve more favourable results (Bahoo et al., 2023; Nambisan et al.,
2019). At the same time, AIA improve company access and use of information, helping managers
fully understand their own difficulties in business development and innovation process. Managers

also have a greater chance of quickly comprehending the important knowledge of the external
market and precisely exploring their customers' requirements (Günther et al., 2017), lower
company production costs and boost productivity (Czarnitzki et al., 2023). In conclusion the AIA
enhanced the competitiveness and improve the risk-taking measures which leads to focus on ESG
performance.
Thirdly, AIA helps relieve firm financial limitations, which ultimately increases ESG performance.
The high costs associated with applying ESG and resource restrictions are major factors for the
low ESG performance across firms. Currently, AIA is the key route for Chinese firms' future
development, and the government has implemented a series of regulations to deepen the digital
economy's integration with the real economy (Luo et al., 2023; Wen et al., 2022). By actively
responding to the digital development plan, it helps firms to improve the legitimacy of their
operations, acquire more government subsidies, and enjoy matching preferential policies. These
things can give direct financial assistance to enterprises to improve their ESG performance.
Moreover, the signal theory argues that government backing can signal to the outside world that
the firm is performing well, making it more attractive to potential investors. This further helps to
reduce the challenge of financial constraints that the organization is currently facing and promotes
the improvement of ESG performance.
Lastly, AIA helps enhance firms' ESG performance by reducing financing costs. It enables
companies to optimize their financing expenses and secure favourable financial provisions for
ESG projects. When external funding is needed for ESG initiatives, firms often rely on bank loans
and other debt agreements (Macpherson et al., 2021). However, due to intense market competition,
firms frequently choose not to disclose ESG project information, resulting in a critical information
asymmetry about ESG (Siew et al., 2016). As a result, creditors tend to increase the financing cost
for ESG projects, which are already challenging and risky. However, digital technology (AIA)
facilitates the timely and accurate assortment and transmission of information within firms (Bosse
et al., 2023; Mukhopadhyay et al., 2021). Hence, this helps creditors comprehensively understand
the firm's internal operations and obtain timely information regarding the investment project.
Consequently, the reduced information asymmetry leads to lower financing costs and supports
funding promising ESG projects. Based on the above aforementioned insights. We formulate our
first hypothesis.
H1: Adopting AI in firms' operations helps enhance ESG performance.

3.2 Artificial intelligence adoption and ESG performance: Firm’s ownership
Next, we analyze how AIA affects ESG performance based on the ownership structure of firms.
Previous studies have yet to explore the impact of state ownership on a firm's ESG prospects for
AIA. This study investigates the relationship between state ownership and ESG outcomes by
categorizing ownership into two main groups: state-owned enterprises (SOEs) and non-state-
owned enterprises (non-SOEs). The goal is to fill the research gap and understand how different
types of ownership may impact ESG performance. The distinction between SOEs and non-SOEs
has become increasingly significant in the current global economy. It can be seen a growing
number of SOEs may be noticed in the make-up of the Fortune Global 500 (FG500) firms. The
FG500 had 27 SOEs in 2000, but by 2017, there were 102, accounting for 20% of the FG500.
Notably, out of the initial 27 FG500 SOEs in 2000, 9 were from China. However, in 2017, 75 out
of 102, the majority were from China. Furthermore, China has a significant presence of SOEs on
a global scale, with approximately 150,000 SOEs, out of which 75 are listed in the FG500. China's
1978 economic reform accounted for this growth in SOEs and their market valuation. As a result,
China's SOEs have become vital players in both the domestic and global markets.
Consequently, the Chinese market is frequently the primary focus of academic study on SOEs
(Jiang & Kim, 2020; Lu & Zhu, 2020). As an extension of the government, state-owned enterprises
greatly affect the firm's objectives, CEO compensation, resource allocation, transparency, and
overall firm performance (Lin et al., 2020). Considering the managerial (the managerial
perspective focuses on the decision-making and strategic choices of company managers) and
political (refers to the influence of government policies, regulations, and political agendas)
perspectives, we contend that the state ownership of enterprises can play a significant role in
shaping the connection between artificial intelligence adoption and ESG performance. Firstly, the
operation of SOEs within specific regulatory frameworks and government policies provides a
structured environment for decision-making and concentrates on innovation, enabling them to
focus on important objectives, driving economic growth, ensuring political stability (Kowalski et
al., 2013), and driving SOEs towards enhancing profit maximization (Choe & Yin, 2000). This
shift towards profit maximization potentially leads to a greater emphasis on ESG considerations
and creates stronger incentives for SOEs to adopt AI technologies that drive sustainability.
On the other hand, non-SOEs, due to their limited political connections, higher information
asymmetry, and managers' compensation structures, may face challenges in generating high profits

and fostering innovation, making them less attractive in comparison (Dai & Cheng, 2015).
Secondly, the state-ownership structure in SOEs brings a robust framework for governance and
accountability and higher decision-making processes. The hierarchical nature of state-owned
entities fosters a culture of collaboration and collective responsibility, where multiple layers of
approval and coordination are in place to ensure alignment with strategic objectives (Gruber,
2023). Although SOE managers have higher autonomy in implementing risky ESG initiatives
(Braadbaart et al., 2007), this highlights the emphasis on prudence and long-term sustainability, as
decisions are made collectively with the organization's and stakeholders' best interests. Non-SOEs
face challenges in effectively carrying out AIA-enabled ESG activities due to their limited
autonomy, lower flexibility, and high policy burden. The constrained decision-making authority
and rigid operational structures of non-SOEs hinder their ability to fully leverage AIA technologies
for sustainable practices. Lastly, non-SOEs encounter distinct challenges regarding funding and
resource allocation. Soft budget constraints imposed by shareholders and investors (Lin et al.,
1998), can potentially divert financial resources from investing in AI adoption and ESG initiatives
(Liang et al., 2012). In contrast, SOEs tend to prioritize and maintain higher levels of investment
in research and development (R&D). This strategic focus on R&D highlights the commitment of
SOEs to drive innovation and technological advancements, which can also support their efforts in
leveraging AIT and enhancing ESG performance.
SOEs possess distinct advantages over non-SOEs in fostering inter-firm collaborations,
particularly in innovation production. Firstly, state ownership in various corporations strengthens
the network of relationships between firms, as the control rights are partially or entirely in the
hands of the same owner (Belloc, 2014). This facilitates decision-making processes concerning
the adoption of AIA and the enhancement of ESG performance. While non-SOEs may have shared
controlling shareholders, in some cases, they hinder the adoption of AI and ESG projects.
Based on these arguments, we can logically propose the undermentioned hypothesis:
H2: Compared to firm-type ownership, the impact of AIA on ESG performance is more
pronounced in SOEs than non-SOEs.
3.3 Artificial intelligence adoption and ESG performance: Types of state-ownership
One of the most defining aspects of Chinese SOEs is their highly centralized ownership structure,
with the central and local governments functioning as the principal shareholders. However, since
2003, there have been significant reforms in managing state-owned assets. These changes are

intended to address the problem of unclear ownership rights, in particular with regard to identifying
the actual ownership of SOEs. The 16th National Congress of the Communist Party of China
(CPC) in November 2002 emphasized the need for the government to build a system for managing
state-owned assets. This system allows the central and local governments to act as shareholders on
behalf of the state, taking on the responsibilities and obligations related to interests, rights, and
duties.
Moreover, the report delineated the responsibilities of the central and local governments in
overseeing different types of SOEs, both at the local and central levels. According to the findings
of the report, the central government controls and governs large-scale SOEs that are critical for the
nation's economy and national security, such as the development of infrastructure or the extraction
of natural resources. On the other hand, local governments are responsible for owning and
managing smaller-scale SOEs that are less important to the overall economy and national interests.
This allocation of ownership roles ensures effective governance and strategic decision-making
within the SOE sector. Consequently, in March 2003, China established the State-owned Assets
Supervision and Administration Commission (SASAC) as a dedicated entity to fulfil the central
government's shareholder role for major and significant SOEs. SASAC operates as an independent
agency directly accountable to the State Council, assuming the responsibility of representing the
state's interests as a stakeholder in SOEs. Its establishment aimed to ensure effective oversight and
governance of these crucial enterprises, safeguarding the state's investments and promoting long-
term development. However, in contrast to the executive branch, the SASAC is not responsible for
any public administrative responsibilities. When it was first established, the SASAC was
responsible for monitoring 189 SOEs that were classified as "central SOEs." Which collectively
possessed assets worth RMB 6.9 trillion (equivalent to approximately US$1 trillion) by the end of
2002. In 2003, SASAC initiated a comprehensive reform of the central SOE boards, aiming to
enhance corporate governance by increasing the presence of external directors and strengthening
their role in monitoring business operations. Before the board reform, the boards of directors of
central SOEs often overlapped with top management, limiting their effectiveness in providing
independent oversight and guidance. The board reform now mandates all parent companies of
central SOEs to appoint independent directors who serve on the corporate boards, ensuring greater
transparency and accountability in their decision-making processes. These Independent directors
play a crucial role in enhancing ESG performance by incorporating sustainable considerations into

decision-making processes (Birindelli et al., 2018); this process facilitates AIA adoption to
enhance ESG performance.
In comparison, the SASAC-2 standards require the active involvement of outside directors in
strategic planning, financial decisions, investment choices, and the selection and evaluation of
SOE management. As a result, by the end of 2018, approximately 90% of the central SOEs had
either completed or were in the process of implementing this board reform. This reform signifies
a significant step towards enhancing corporate governance and fostering greater transparency and
accountability within these state-owned enterprises. Therefore, considering the actions of SASAC
for central SOEs, the ample monitoring function within central SOEs leads to a greater influence
of AIA on ESG performance than local SOEs. As a result, we have formulated the following
hypothesis (H3):
H3: Compared to the type of SOEs, the impact of AIA on ESG performance is higher in central
SOEs than in local SOEs.
4. Research data and methodology:
4.1 Data and sample
This study obtained financial data from the China Stock Market and Accounting Research
(CSMAR) database. Information on ESG disclosure was obtained from the Bloomberg database,
and artificial intelligence data were obtained from the database (CSMAR). This centralized
database focuses solely on China's economic and financial matters. This database contains
comprehensive financial information about various companies listed in China's stock market. To
ensure the validity of our research, we carefully selected the companies to be included in our
analysis. We excluded companies in the financial and insurance sectors and those that received
special privileges or underwent transfers. Additionally, we excluded firms where essential
information was missing (Hao et al., 2023). After applying these criteria, the final sample included
4348 firm-year observations.
Our sample consists of both state-owned enterprises (SOEs) and non-state-owned enterprises (non-
SOEs) across different industries in China. We analyzed the financial data from 2010 to 2020. This
particular time period was chosen because, starting in 2010, Chinese A-listed firms began
voluntarily disclosing information related to environmental, social, and governance (ESG) factors.
By considering this period, we aimed to ensure that our findings would be reliable and unbiased
when assessing the impact of the COVID-19 pandemic (Broadstock et al., 2021).

The study uses Figure 2 to visually illustrate a conceptual framework, which helps in presenting a
logical progression of hypothesis development in a more intuitive manner.
Note: In Figure 2, the solid lines represent the direct impact of Artificial intelligence adoption (AIA) on
firm ESG performance. On the other hand, the dotted lines depict the moderating effect of types of State-
Owned Enterprises (SOEs) (local vs. central).
4.2 Variable measurement:
4.2.1 Dependent variable measurement: ESG
We gathered data on ESG from two main sources from Bloomberg ESG indices and the China
Stock Market & Accounting Research (CSMAR) database. Bloomberg relies on various publicly
accessible sources such as annual reports, sustainability reports, and company websites. In order
to have an accurate panel (Wang & Juo, 2021), we excluded firms with missing data. The
Bloomberg ESG indices utilize a comprehensive index system and encompass various original
variables related to emissions, climate change policies, and energy consumption. The environment
dimension of the indices includes factors such as air quality, ecological impact, energy usage,
waste management, and water resources. The social dimension covers aspects like community
relations, diversity, ethical compliance, employee well-being, and supply chain practices. The
governance dimension encompasses areas such as audit oversight, board composition,
compensation practices, diversity, independence, governance oversight, sustainability governance,

and tenure. Bloomberg's ESG data provide detailed insights into a firm's ESG performance and
are widely employed in research studies Further, in some cases where data is unavailable or
inaccessible, Bloomberg has the ability to request additional information. The testing methodology
incorporates more than 120 data elements to calculate a standardized ESG score, as well as three
sub-scores. The ESG score range from 0 to 100, with lower scores indicating fewer data points and
higher scores reflecting comprehensive disclosure of the required information by companies.
However, the Bloomberg ESG disclosure score takes a quantitative approach, assessing these
reports according to established standards and principles to provide a more detailed analysis. It
emphasizes the need to consider separate subcomponents of the ESG score, including
environmental, social, and governance factors, as their individual effects can influence the overall
outcome (Buallay et al., 2021). Furthermore, to mitigate the impact of extreme values on the
results, continuous variables were adjusted at the 1% level using a technique called
"Winsorization."
4.2.2 Independent variable: Artificial intelligence adoption
In this study, the main focus revolves around integrating artificial intelligence adoption (AIA)
within corporations. However, accurately measuring the degree of AIA implementation within
these firms has proven challenging for researchers and scholars. While a few studies have
successfully used textual analysis to assess AI adoption in organizations (Alekseeva et al., 2020;
Babina et al., 2020), this particular task has caught our attention. The reason is that listed firms
often disclose information about their AIA initiatives through textual disclosures within the
management disclosure and analysis (MD&A) sections of their 10-K filings in annual reports. The
MD&A section provide stakeholders valuable insights into a company's internal and external
operations. It is reasonable to expect that if a corporation is pursuing an AIA initiative, it will
disclose it in its MD&A. As a result, this study leverages machine learning techniques and Python
software to comprehensively evaluate the extent of AIA integration in firms by analyzing their 10-
K filings from annual financial reports using textual analysis.
The process involves obtaining financial reports from the CSMAR database for A-share listed
firms spanning 2010 to 2020. Firstly, we obtain financial reports from the CSMAR database for
these firms. We use a Python crawler function to extract the relevant information to access the
management disclosure and analysis (MD&A) section from the annual 10-K filings. Subsequently,

we carefully examined this MD&A section using the JAVA PDF-box library to identify and match
specific keywords associated with AIA. These keywords are selected based on insights from the
"China Artificial Intelligence Industry Analysis Report 2020." We diligently eliminate repetitive
or irrelevant descriptions to ensure our findings' precision, clarity, and comprehensiveness. We
employ a binary variable called the AIA indicator to represent the extent of AIA integration. If a
firm's annual report's MD&A section contains any reference to AIA, the indicator is assigned a
value of 1; otherwise, it receives a value of 0. Additionally, once a firm initiates AIA adoption in a
specific year (t), the AIA indicator remains set to 1 for that year and all subsequent years for the
same firm, enabling us to track the progression of AI adoption over time.
4.2.3 State-ownership
According to earlier studies (Ren et al., 2022), state-ownership (SOEs) is a binary variable with a
value of 1 if the firm is owned by the state and 0 otherwise.
4.2.4 Measurement of the control variable
Numerous factors related to firms, industries, and boardrooms have been identified as potential
influences on ESG, as highlighted in prior studies (Ren et al., 2022; Romano et al., 2020). To
maintain consistency, we consider these factors as control variables that may impact ESG. These
variables include firm size (F_SZ), returns on assets (RO_A), Tobin's Q (TQ-ratio), cash flow
(CFLO), debt-to-assets ratio (DEBTA), number of board members (NoBM) and the tenure of
CEOs (CEOT). Thus, we incorporate these control variables in this study to address potential
agency costs. Specifically, we consider board size (BD_SZ), board independence (BO_IND), and
largest shareholder percentage (HH-Index) (Chow et al., 2018), as essential factors. Additionally,
we examine CEO characteristics as control variables with ESG investment decisions. This includes
variables such as retiring CEOs and CEO duality. CEO duality is represented by a dummy variable
called Duality (DUAL), indicating whether the CEOs and chairpersons are the same person. For
further details and explanations of these variables, see Table 1.
Table 1: Variable definition and explanation

Type Variable Definition
Independent variable
A binary variable is used to represent the presence of AI
AIA
adoption in a firm's MD&A (Management's Discussion and

Artificial intelligence Analysis). When a firm starts adopting AI in a specific year (t),
adoption we assign the value of 1 to the binary variable (AIA) for that
firm in year t and all subsequent years.
Dependent variable
Environmental, Bloomberg's ESG total score ranges between 0 and 100
ESG social, and
governance
ESG environment Bloomberg's environmental activity total score ranges between
Env component 0 and 100
ESG social Bloomberg's social activity total score ranges between 0 and
Soc component 100
ESG governance Bloomberg's governance activity total score ranges between 0
Gov component and 100
Control variable
F_SZ Firm size Firm size calculated as in (total Assets)
NoBM Number of board The total number of board meeting in one calendar year.
members
RO_A Return on assets Net income divided by total assets
BO_IND Board independence Board Independence is calculated as the number of
independent directors/total number of board members.
Board size Board size is calculated as the total number of directors on the
BD_SZ
board
The Herfindahl-Hirschman Index is a well-known indicator that
Herfindhal-Hirschan helps gauge a market's concentration within a specific industry.
HH-Index
Index It acts as a widely accepted tool to evaluate the level of
competition prevailing in the market.
This financial indicator is calculated by adding the value of
TQ-ratio Tobin's Q ratio stocks and the value of debt and then dividing the sum by the
total value of assets.
DEBTA Debt to assets ratio Total debt divided by total assets
CFLO Cash flow Log of cash flow
Duality A binary variable for CEO duality, taking 1 if the CEO also
DUAL
served as Chair of the Board, 0 otherwise
Retiring CEO A dummy variable takes the value 1 if CEO is retired,
CEORT
otherwise its zero.
CEO-TN CEO tenure Total Number of a CEO serving years
Moderator variable
State-owned A dummy variable equal to 1 if firm controlled by
SOEs
enterprises government, otherwise zero.
Local state-owned A dummy variable equal to 1 if firm controlled by local
Local_SOEs
Central state-owned A dummy variable equal to 1 if firm controlled by central
Central_SOEs

4.3 Econometric model
To examine how artificial intelligence (AIA) affects Environmental, Social, and Governance
(ESG) factors, we use the baseline model to test our hypothesis 1.
𝐸𝑆𝐺!" = α + β# 𝐴𝐼𝐴$% + β& 𝑋!" + 𝜔'()* + 𝜔+,-./"*' + 𝜀!" … … 𝐸𝑞. (1)
Where in equation (1): The subscript refers to each individual firm, while 𝑡 denotes the specific
year of observation. 𝐸𝑆𝐺!" represents the factors and their impact on each firm's performance, and
𝐴𝐼𝐴$% indicates the firm's utilization of artificial intelligence. The variable 𝑋!" represents a set of
control variables at the firm, industry, and board levels, including factors like firm size (F_SZ),
return on assets (RO_A), Tobin's Q (TQ-ratio), cash flow (CFLO), Herfindahl-Hirschman Index
(HH-Index), board independence (BO_IND), board size (BD_SZ), and CEO tenure (CEOT) (see
table 1 for more detailed information on these variables). Furthermore, 𝜔'()* is a vector
representing time-fixed effects, and 𝜔+,-./"*' is an industry-fixed effects dummy variable used to
address potential unobserved influences in the model. Lastly, 𝜀!" is the random error term. In order
to analyze the moderating impact of AIA on ESG from firm ownership (SOEs vs non-SOEs). We
make a simple adjustment to the model by incorporating an interaction term. The modified
regression equation is as follows:
𝐸𝑆𝐺!" = α + β# 𝐴𝐼𝐴$% + β& Ownership$% + β0 𝐴𝐼𝐴$% × Ownership$% + β0 𝑋!" + 𝜔'()*
+ 𝜔+,-./"*' + 𝜀!" 𝐸𝑞. (2)
𝐸𝑆𝐺!" = α + β# 𝐴𝐼𝐴$% + β& TYP$% + β0 𝐴𝐼𝐴$% × TYP$% + β0 𝑋!" + 𝜔'()* + 𝜔+,-./"*'

+ 𝜀!" 𝐸𝑞. (3)
Equations (2) and (3) illustrate the moderating influence of firm ownership and types of State-
Owned Enterprises (SOEs). The variable "ownership" encompasses both SOEs and non-SOEs,
while "TYP" represents the two types of SOEs: local and central. The comprehensive regression
model accounts for time- and industry-specific effects denoted by ωyear and ωIndustry, respectively.
The residual term is represented by εit.
5. Empirical Results
5.1 Descriptive statistics

Table 2 presents descriptive statistics of the study variables. Panel (A) reports the total sample's
mean, median, and standard deviation. The average value of AIA is 0.231, with a standard
deviation of 0.421, indicating variation in AIA technology adoption among firms. The mean ESG
value is 20.83, with a standard deviation of 7.134.
Panel (B) and Panel (C) display the descriptive statistics for state-owned enterprises (SOEs) and
non-state-owned enterprises (non-SOEs) samples. For SOEs, the average values of ESG and AIA
is 18.667 and 0.169, respectively. For non-SOEs, the average values of ESG and AIA is 19.862
and 0.255, respectively.
Table 2: Summary statistics

Panel A: Main sample Panel B: SOEs sample Panel C: non SOEs sample
(N=4348) (N=975) (N=3373)
Mean Median Std. Dev. p25 p75 Mean Median Std. Dev. Mean Median Std. Dev.
Dependent variable
ESG 20.83 19.835 7.134 16.529 23.554 18.667 19.008 5.429 19.862 19.421 6.345
Env 11.082 9.302 8.136 6.977 13.178 9.346 9.302 5.116 9.83 9.302 6.533
Soc 23.642 22.807 9.902 17.544 28.07 22.43 22.807 8.392 22.67 22.807 9.66
Gov 45.199 44.643 5.396 42.857 48.214 42.026 42.857 4.424 45.289 44.643 5.312
Independent variable
AIA .231 0 .421 0 0 .169 0 .375 .255 0 .436
Control variable
F_SZ 21.647 21.556 1.018 20.906 22.205 22.156 22.004 1.15 21.436 21.365 .876
DEBTA .382 .357 .216 .21 .532 .507 .505 .214 .331 .303 .194
CFLO 6.106 7.853 3.503 6.335 8.31 6.312 8.034 3.579 6.02 7.791 3.468
BO_IND .372 .333 .053 .333 .429 .364 .333 .051 .375 .333 .054
BD_SZ 8.542 9 1.602 7 9 9.203 9 1.817 8.267 9 1.416
NoBM 9.318 9 3.552 7 11 8.969 8 3.407 9.463 9 3.602
CEORT .022 0 .147 0 0 .013 0 .113 .026 0 .159
DUAL .31 0 .463 0 1 .104 0 .305 .396 0 .489
CEO-TN 3.549 2.75 2.883 1.167 5.333 3.241 2.417 2.91 3.676 3 2.862
HH-Index .407 .502 .238 .258 .538 .42 .502 .237 .402 .502 .238
TQ-ratio 2.218 1.79 1.585 1.344 2.631 2.069 1.646 1.53 2.279 1.861 1.603
5.2 Correlation matrix

A pair-wise correlation matrix is reported in table-3. As predicted, the correlation between the
variables AIA and ESG are positively and significantly correlated with ESG and its component
(0.0619***, 0.0640***, 0.0306, 0.0634***), respectively. Providing initial evidence to support
H1, this posits that an increase in AIA enhances firm ESG performance. Furthermore, the
significant correlations observed between most of our control variables and ESG measures indicate
the validity of our control set.

Table 3: Correlation Coefficient Matrix
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16)
ESG Env Soc Gov AIT F_SZ DEBTA CFLO BO_IND BD_SZ NoBM CEORT DUAL CEO-TN HH-Index TQ-ratio
ESG 1
Env 0.877*** 1
Soc 0.808*** 0.550*** 1
Gov 0.551*** 0.299*** 0.327*** 1
AIA 0.0619*** 0.0640*** 0.0306 0.0634*** 1
F_SZ -0.0747*** -0.0334* -0.00324 -0.217*** -0.0326 1
DEBTA -0.0898*** -0.0585*** -0.00900 -0.188*** -0.0413* 0.566*** 1
CFLO -0.0416* -0.0337* -0.00992 -0.0729*** -0.0184 0.135*** -0.0748*** 1
BO_IND 0.0717*** 0.0505** 0.0583*** 0.0605*** 0.0659*** -0.0525** -0.0279 -0.0282 1
BD_SZ -0.0648*** -0.0432* -0.0270 -0.122*** -0.100*** 0.248*** 0.134*** 0.113*** -0.521*** 1
NoBM 0.0603*** 0.0615*** 0.0436** 0.0405* 0.107*** 0.279*** 0.260*** -0.108*** 0.0511** -0.0291 1
CEORT -0.00615 -0.00235 -0.0246 -0.00173 -0.0212 -0.0131 0.00884 0.0313 -0.0185 -0.00732 -0.00867 1
DUAL 0.0696*** 0.0512** 0.0188 0.113*** 0.0264 -0.136*** -0.0798*** -0.0530** 0.104*** -0.165*** 0.0153 0.154*** 1
CEO-TN -0.0112 0.00911 0.00252 -0.0902*** 0.0734*** 0.0871*** 0.0245 0.0765*** 0.0668*** -0.00935 -0.0245 0.0662*** 0.169*** 1
HH-Index 0.0247 0.0157 -0.000824 0.0560*** 0.0734*** 0.0192 0.0572*** -0.111*** -0.00381 -0.0156 0.0728*** 0.0188 0.0411* -0.0992*** 1
TQ-ratio 0.0483** 0.0324 0.0359* 0.0591*** 0.132*** -0.276*** -0.206*** 0.0204 0.0318 -0.111*** -0.0275 0.00906 0.00910 0.0907*** -0.0895*** 1
* ** ***
Note: p < 0.05, p < 0.01, p < 0.00

5.3 Baseline regression
5.3.1 AIA and ESG
Table-4 reports the baseline regression results for ESG and its component (Env, Soc, and Gov)
based on measurements of artificial intelligence (AIA). The impact of AIA with ESG and all three
indicators is positively correlated, and the coefficient (-0.016, -0.066, -0.104, -0.025, -0.198 and -
0.459) are statistically significant (p<0.01). These results reveal that when the firm uses AIA in its
operation, it significantly affects the firm ESG performance. These findings provide support for
Hypothesis 1.
Moreover, the findings also have an economic significance. For instance, the measure of artificial
intelligence (AIA) exhibits a standard deviation of 0.421 and a mean value of 20.83 for ESG. With
reference to the coefficient (.774) attributed to AIA as presented in Column 3 of table-4, we observe
that for every one standard deviation rise in AIA [(0.774 × 0.421) / 20.83], the firm ESG
performance enhanced by 1.56%.
The remaining control variables are also statistically significant with ESG and its component,
further consistent with prior studies (Zheng et al., 2023). For example, we find that F_SZ and TQ-
ratio are positively correlated, while HH-Index is negatively correlated.
Table 4: Effects of artificial intelligence adoption on ESG and its components.

(1) (2) (3) (4) (5) (6)
ESG ESG ESG Env Soc Gov
AIA 1.621*** 1.997*** .774*** .213 1.277*** .663***
(.192) (.216) (.22) (.259) (.355) (.243)
F_SZ 1.476*** 1.082*** 1.615*** .49***
(.137) (.162) (.22) (.151)
DEBTA -1.758*** -2.418*** -1.526 .761
(.578) (.712) (.931) (.64)
CFLO -.005 -.009 -.031 -.011
(.017) (.021) (.028) (.019)
BO_IND 1.617 2.611 3.525 -.81
(1.849) (2.206) (3.018) (2.046)
BD_SZ .008 -.028 .224* -.178**
(.081) (.095) (.13) (.089)
NoBM .017 .042* .012 .026
(.019) (.023) (.031) (.021)
CEORT -1.137** -1.143* -1.141 .576
(.503) (.608) (.804) (.556)
DUAL .113 .497** .237 -.007
(.198) (.237) (.317) (.219)
CEO-TN .137*** .05 .155*** .04
(.027) (.032) (.044) (.03)
HH-Index -1.427*** -.342 -1.221** 2.756***
(.35) (.462) (.615) (.387)
TQ-ratio .318*** .239*** .405*** .311***

(.039) (.045) (.062) (.043)
_cons 18.948*** 19.055*** -13.727*** -14.917*** -16.851*** 33.521***
(.175) (.074) (3.176) (3.76) (5.14) (3.514)
Year &Industry NO NO YES YES YES YES
Observations 4348 4348 4348 4348 4348 4348
R-squared z .026 .116 .047 .064 .048
Note: Standard errors are in parentheses*** p<.01, ** p<.05, * p<.1
5.3.2 Addressing Persistent Firm Characteristics
The baseline regression indicates a positive association between AIA and the firm ESG
performance. However, concerns have been raised regarding the possibility of unobservable and
persistent firm characteristics driving the results, which can lead to biased estimates. We further
address these concerns through changes regression.
Changes regression involves analyzing the change in variables over time instead of their absolute
values (Zheng et al., 2023). This approach helps to control for unobservable and persistent firm
characteristics that remain constant over time. We conducted a regression analysis where we
regressed changes in ESG (ΔESG, ΔEnv, ΔSoc and ΔGov) on changes in artificial intelligence
measure (∆AIA) and other control variables. The results of this analysis are reported in table-5.
The results remain significant and positive with our baseline analysis.
Table 5: Artificial intelligence adoption and ESG performance: Change Regression

(1) (2) (3) (4)
ΔESG ΔEnv ΔSoc ΔGov
AIA 1.013*** .781*** 1.519*** .96***
(.202) (.266) (.309) (.19)
F_SZ .52*** .618*** .495*** .398***
(.101) (.132) (.157) (.095)
DEBTA -1.69*** -1.87*** -1.347* -1.522***
(.49) (.667) (.768) (.461)
CFLO .026 .024 .041 .017
(.018) (.023) (.027) (.017)
BO_IND -2.516 -4.32** 1.211 -1.247
(1.617) (2.136) (2.489) (1.522)
BD_SZ -.301*** -.3*** -.047 -.263***
(.063) (.083) (.098) (.059)
NoBM .056*** .038 .077*** .036**
(.019) (.024) (.029) (.018)
CEORT -.817* -.802 -1.39* -.6
(.481) (.635) (.746) (.453)
DUAL .516*** .334 .443 .191
(.185) (.246) (.284) (.174)
CEO-TN .122*** .058* .123*** .049**
(.026) (.034) (.04) (.024)
HH-Index -2.828*** -1.652*** -2.979*** -.14
(.319) (.433) (.497) (.3)
TQ-ratio .188*** .293*** .262*** .25***

(.038) (.051) (.06) (.036)
_cons 11.898*** .719 11.044*** 38.051***
(2.137) (2.769) (3.319) (2.011)
Year &Industry YES YES YES YES
Observations 5007 4099 4854 5007
R-squared .087 .046 .049 .046
5.3.2 AIA and ESG: SOEs vs Non_SOEs

In economies like China, ownership concentration is prevalent, especially in state-owned
enterprises (SOEs) where the government holds a significant stake. Given the government's
involvement in environmental social and governance concerns, we examined the relationship
between AIA and ESG specifically in SOEs and non-SOEs. Table 6 presents the findings for a
subset of SOEs and non-SOEs in columns 1-8. The coefficient of AIA with ESG and its
components (Env, Soc, and Gov) is 0.132, -1.218**, 1.606*, and 0.752, respectively, significant
at the 1% level. In the non-SOE sample, the coefficient of AIA is 0.862***, 0.37, 1.183***, and
0.559**, significant at the 1% and 5% levels. These results indicate that SOEs prioritize their ESG
performance by adopting AIA more than non-SOEs. Moreover, a comparison between the
outcomes of SOEs and non-SOEs reveals that SOEs invest more significantly in AIA, confirming
our second hypothesis (H2).
5.3.3 AIA and ESG: Type of SOEs (Local vs Central)
In this section, we investigate whether the impact of AIA on ESG varies among different types of
State-Owned Enterprises (SOEs). SOEs serve as the primary extension of the Chinese government,
and they are categorized into central and local SOEs to ensure efficient operation. The central and
local governments are entrusted with the responsibility of overseeing these enterprises on behalf
of the state. Given the significant stake held by the central government in central SOEs, we focus
on analyzing the findings of local SOEs in columns 1-4 and central SOEs in columns 5-8 as shown
in Table 7. We observe that the coefficient of AIA for central SOEs is stronger and more statistically
significant at the 1% level in relation to ESG performance. On the other hand, the coefficient of
AIA for local SOEs is less pronounced, suggesting a weaker effect of AIA on ESG in comparison
to central SOEs. These results align with our hypothesis (H3). Additionally, the other control
variables in Table 7 exhibit expected signs and are statistically significant.

Table 6: Impact of artificial intelligence adoption on Firm ESG performance: Types of Ownership
(1) (2) (3) (4) (5) (6) (7) (8)
SOEs non SOEs
ESG Env Soc Gov ESG Env Soc Gov
AIA .132 -1.218** 1.606* .752 .862*** .37 1.183*** .559**
(.489) (.547) (.82) (.566) (.251) (.299) (.4) (.274)
F_SZ 1.807*** 1.24*** 2.437*** .125 1.361*** 1.072*** 1.333*** .52***
(.257) (.295) (.446) (.298) (.168) (.199) (.265) (.184)
DEBTA -1.969* -2.35* -2.698 -1.306 -1.777** -2.728*** -.672 1.211
(1.039) (1.406) (1.78) (1.203) (.72) (.856) (1.138) (.787)
CFLO -.011 -.026 .023 -.001 -.004 -.002 -.052 -.015
(.034) (.038) (.058) (.039) (.02) (.025) (.032) (.022)
BO_IND 3.619 5.194 3.664 .029 1.94 1.79 5.673 -1.28
(3.415) (3.681) (5.898) (3.956) (2.259) (2.745) (3.633) (2.47)
BD_SZ -.004 .113 -.12 -.217 .065 -.075 .532*** -.171
(.131) (.135) (.222) (.152) (.105) (.127) (.168) (.115)
NoBM .024 .058 -.006 .001 .017 .038 .021 .027
(.038) (.042) (.065) (.044) (.023) (.027) (.036) (.025)
CEORT -4.323*** -6.128*** -3.881 -1.672 -.806 -.66 -.732 .764
(1.516) (1.616) (2.512) (1.756) (.544) (.671) (.858) (.594)
DUAL .642 .573 1.111 1.05* .02 .537** .012 -.169
(.49) (.584) (.83) (.567) (.222) (.266) (.349) (.243)
CEO-TN .035 .037 -.077 -.071 .187*** .055 .279*** .083**
(.046) (.052) (.079) (.053) (.034) (.04) (.054) (.037)
HH-Index -1.736*** -.187 -1.313 3.886*** -1.355*** -.458 -1.177 2.312***
(.619) (.785) (1.213) (.717) (.423) (.561) (.719) (.463)
TQ-ratio .496*** .147 .989*** .381*** .291*** .246*** .322*** .287***
(.1) (.118) (.168) (.116) (.044) (.05) (.068) (.048)
_cons -22.294*** -20.239*** -32.416*** 40.836*** -11.699*** -13.935*** -14.333** 33.615***
(6.354) (7.22) (11.07) (7.361) (3.845) (4.557) (6.092) (4.204)
Year &Industry YES YES YES YES YES YES YES YES
Observations 975 975 975 975 3373 3373 3373 3373
R-squared .149 .08 .121 .083 .115 .049 .067 .047

Table 7: Impact of artificial intelligence adoption on firm ESG performance: Types of SOEs (Local vs Central SOEs)
(1) (2) (3) (4) (5) (6) (7) (8)
ESG Env Soc Gov ESG Env Soc Gov
AIA 0.473* 0.562* 0.383 0.566** 0.369** 0.405 0.369** 0.500**
(0.283) (0.338) (0.420) (0.230) (0.245) (0.289) (0.368) (0.194)
Local_SOE 1.024*** 0.181 0.686* 1.766***
(0.239) (0.282) (0.352) (0.197)
AIA´Local_SOE 0.075 -0.281 0.170 0.259
(0.528) (0.619) (0.834) (0.385)
Central _SOEs -0.190 -0.287 0.206 -0.982*
(0.587) (0.702) (0.810) (0.575)
AIA´ Central _SOEs 2.888*** 3.046*** 0.617 0.267**
(0.874) (0.891) (1.937) (1.012)
F_SZ 0.548*** 0.519*** 0.453*** 0.079 0.557*** 0.524*** 0.454*** 0.098
(0.118) (0.138) (0.175) (0.100) (0.118) (0.139) (0.175) (0.100)
DEBTA -1.658*** -2.111*** 0.008 -2.507*** -1.713*** -2.109*** -0.046 -2.594***
(0.558) (0.649) (0.870) (0.474) (0.556) (0.644) (0.866) (0.477)
CFLO 0.030*** 0.028*** 0.017*** 0.014*** 0.030*** 0.086*** 0.048*** 0.045***
(0.043) (0.062) (0.063) (0.043) (0.042) (0.016) (0.016) (0.019)
BO_IND 0.661 0.994 1.151 2.271 0.856 0.851 1.371 2.943*
(2.033) (2.351) (2.971) (1.752) (2.044) (2.360) (2.980) (1.762)
BD_SZ -0.186*** -0.127* -0.138 -0.210*** -0.181*** -0.122* -0.134 -0.211***
(0.064) (0.073) (0.089) (0.056) (0.065) (0.073) (0.090) (0.057)
CEORT 0.263 0.508 -1.047 -0.467 0.145 0.467 -1.116 -0.647
(0.682) (0.891) (0.861) (0.521) (0.688) (0.892) (0.863) (0.522)
HH-Index -0.745* -0.401 -1.344** 0.665* -0.765* -0.429 -1.352** 0.665*
(0.426) (0.501) (0.629) (0.349) (0.427) (0.501) (0.629) (0.353)
TQ-ratio 0.075 0.102 0.141 0.024 0.060 0.097 0.132 0.006
(0.066) (0.081) (0.096) (0.053) (0.066) (0.082) (0.096) (0.053)
_cons 9.555*** -0.106 13.559*** 43.585*** 9.650*** -0.114 13.675*** 43.605***
(2.569) (2.971) (3.806) (2.143) (2.581) (2.989) (3.818) (2.156)
Year &Industry YES YES YES YES YES YES YES YES
Obs. 3934 3311 3852 3934 3934 3311 3852 3934
R-squared 0.031 0.021 0.018 0.050 0.026 0.022 0.017 0.025
Note: Standard errors are in parenthesis *** p<0.01, ** p<0.05, * p<0.1

5.4 Additional test
To ensure the reliability of our findings, we have employed three distinct methodologies, including
Propensity Score Matching (PSM), Two-System GMM (Generalized Method of Moments), and
Two-Stage Least Squares (2SLS) analysis, thereby validating the robustness of our results.
5.4.1 Propensity score matching (PSM)
The innate differences in firm characteristics between SOEs and non-SOEs may affect the results.
We perform propensity score matching (PSM) to overcome this issue to match SOEs with non-
SOEs based on their observable characteristics. By using both PSM, we can draw definitive
inferences about the effect of AIA on corporate ESG without being affected by the innate
differences between SOEs and non-SOEs.
In order to assess the balance of covariates before and after the implementation of the treatment,
we first plot the distribution of the covariate of interest in Figure 4. This allows us to visually
inspect the differences in the covariate distribution before and after the treatment. Next, in Figure
5 (a) and (b), we use kernel matching to match the pre-treatment and post-treatment groups on the
covariates. Kernel matching involves using a kernel function to estimate the probability density of
the covariates in each group and then matching the groups based on their estimated probability
densities. This helps ensure that the treatment and control groups are comparable with respect to
the covariates and reduces the risk of bias in estimating treatment effects. Once we confirmed the
validity of our matched sample, we conducted a regression analysis on the matched data using
ESG as our variables. The results of this analysis are presented in Table 8, confirming our main
findings.
Table 8: PSM Regression results

(1) (2) (3)
ESG ESG ESG
AIA 0.579*** 0.170** 0.504**
(1.073) (1.146) (1.152)
F_SZ -1.026
(0.673)
DEBTA 2.219
(2.820)
CFLO 0.035*
(0.010)
BO_IND 2.303
(7.664)
BD_SZ -0.045

(0.299)
CEORT 8.586***
(3.210)
HH-Index -0.818
(1.665)
TQ-ratio -0.292
(0.249)
_cons 19.531*** 18.892*** 40.426**
(0.293) (0.578) (15.811)
Year &Industry NO YES YES
Obs. 1927 1927 1927
R-squared 0.011 0.016 0.027
F_SZ
DEBTA
BD_SZ
CFLO
HH-index
CEORT
BO_IND
TQ-ratio
Unmatched
Matched
-50 0 50 100
Standardized % bias across covariates
2
4
1.5
3
kdensity _pscore
kdensity _pscore
1
2
.5
1
0
0
0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1
propensity scores BEFORE matching propensity scores AFTER matching
treated control treated control
5.4.2 Two-step system GMM

To ensure the reliability of our main findings, we conducted sensitivity tests to assess the
robustness of the results. The findings from these tests showed no significant deviations from the
original analysis. Table 9 presents the outcomes of the sensitivity analysis and endogeneity tests,
where we employed a dynamic sysGMM panel estimator. This estimator takes into account the
dynamic interactions between the explanatory variables and addresses any potential bias arising
from unobserved time-invariant heterogeneity. By utilizing this method, we mitigate the risks of
omitted-variable bias and endogeneity concerns. The results obtained from the sysGMM analysis,
as displayed in Table 9, confirm our primary findings, highlighting a significant positive
coefficient for AIA in relation to ESG/Env/Soc/Gov.
Table 9: GMM Regression results
(1) (2) (3) (4)
ESG Env Soc Gov
L.AIA 0.173* 0.824*** -0.208 0.280**
(0.101) (0.117) (0.173) (0.124)
F_SZ 0.181*** 0.077 0.208** -0.440***
(0.054) (0.060) (0.093) (0.066)
DEBTA -1.826*** -1.649*** 0.255 -2.470***
(0.251) (0.285) (0.436) (0.308)
CFLO 0.000 0.000 0.000** -0.000***
(0.000) (0.000) (0.000) (0.000)
BO_IND 3.646*** 3.829*** 5.773*** 0.556
(0.941) (1.074) (1.618) (1.155)
BD_SZ -0.144*** -0.011 -0.080 -0.301***
(0.032) (0.037) (0.056) (0.040)
CEORT -0.291 -0.256 -1.092** -0.010
(0.278) (0.320) (0.482) (0.341)
HH-Index 0.931*** 0.957*** 0.078 1.732***
(0.177) (0.200) (0.305) (0.217)
TQ-ratio 0.309*** 0.154*** 0.378*** 0.209***
(0.029) (0.032) (0.049) (0.035)
_cons 15.292*** 6.414*** 15.920*** 56.027***
(1.196) (1.346) (2.062) (1.467)
Obs. 2864 2864 2864 2864
4.4.3 Two-stage least square 2SLS
The study's main findings may be biased due to endogeneity concerns arising from reverse
causality. Firms that enhance ESG performance may be more likely to adopt AIA initiatives. To
address these endogeneity concerns, we reexamined the base regression model using 2SLS
estimation, a two-stage least squares approach. The artificial intelligence proxy (AIA_FUND),
which we used in this analysis as an instrument variable (IV), satisfies the exogeneity and

correlation requirements, as the F-statistics value (which is significantly higher than 10)
demonstrates. The outcomes of the 2SLS instrument regression are summarized in Table 10. In
Table 10, Section I presents the results of the first stage, where the coefficient of AIA_FUND is
positive and statistically significant at the 1% level. Moving to Section II, according to Columns
(1), (2), (3), and (4), the results of the second stage indicate that the coefficients of AIA for ESG
(0.489**), Env (0.766***), Soc (0.060), and Gov (0.601***) are, respectively. Notably, the
coefficients for Env and Gov are positive and statistically significant at the 1% level, while ESG
is significant at the 5% level. Soc, conversely, shows significance but does not exhibit substantial
changes concerning AIA and ESG disclosure. These findings support our hypothesis that AIA
contributes to increased ESG performance, accounting for potential endogeneity issues.
Table 10: Two stage least square analysis

Section I: First stage
Variable AIT
AIA_FUND 0.680***
-0.0828
DEBTA -0.142***
-0.0223
CFLO -0*
0
BO_IND 0.187*
-0.0957
BD_SZ -0.00331
-0.00329
CEORT -0.0841**
-0.0328
DUAL 0.0252**
-0.0107
CEO-TN 0.00718***
-0.00162
HH-Index 0.178***
-0.0211
TQ-ratio 0.0154***
-0.00321
Constant 0.232***
-0.057
Observations 4348
R-squared 0.088
Section II: Second stage

(1) (2) (3) (4)
ESG Env Soc Gov
AIA 0.489** 0.766*** 0.060 0.601***
(0.227) (0.251) (0.353) (0.195)
F_SZ 0.203 0.086 0.208 -0.507***
(0.126) (0.137) (0.197) (0.109)
DEBTA -1.475** -1.585** 0.487 -2.294***
(0.582) (0.640) (0.916) (0.499)
CFLO 0.000 0.000 0.000 -0.000
(0.000) (0.000) (0.000) (0.000)

BO_IND 2.959 4.545* 6.508* 0.848
(2.149) (2.400) (3.360) (1.844)
BD_SZ -0.178** -0.008 -0.136 -0.241***
(0.076) (0.084) (0.119) (0.065)
CEORT -0.426 -0.195 -1.320 -0.439
(0.668) (0.746) (1.042) (0.573)
DUAL 0.521** 0.400 0.158 0.910***
(0.222) (0.246) (0.347) (0.191)
CEO-TN -0.042 -0.020 -0.076 -0.159***
(0.034) (0.038) (0.053) (0.029)
HH-Index -0.142 0.330 -0.063 1.257***
(0.421) (0.469) (0.663) (0.362)
TQ-ratio 0.177*** 0.041 0.266*** 0.029
(0.063) (0.067) (0.098) (0.054)
_cons 15.518*** 6.220** 16.248*** 57.564***
(2.811) (3.055) (4.392) (2.412)
Obs. 4348 4348 4348 4348
R-squared 0.013 0.010 0.007 0.067
Standard errors are in parenthesis *** p<0.01, ** p<0.05, * p<0.1
6. Discussion and Conclusion

6.1 Policy implication
Based on the research findings, there are many practical implications for government,
policymakers, and firm managers. Firstly, the government and policymakers should actively
encourage and support the adoption of AI in organizations. This can be done through incentives,
subsidies, and funding for AI research and development. They should also develop policies and
regulations that promote the integration of AI technologies for ESG performance and
environmental sustainability. Collaboration between government agencies, research institutions,
and businesses is crucial for the successful implementation of AIA solutions for better ESG.
Investing in educational and training programs to develop a skilled workforce capable of
effectively utilizing AI for environmental, social and governance practices is essential.
Firm managers should embrace and invest in AI adoption technologies to enhance ESG
performance. This involves allocating resources and budget for AI adoption, fostering an
innovative culture that encourages employees to leverage AI for sustainability, and collaborating
with technology providers and researchers.
Developing customized AI solutions that address specific environmental challenges and contribute
to sustainable development is important. Engaging with AI technology providers and researchers
can help leverage their expertise in creating tailored solutions.

Effective communication with financial analysts and stakeholders is key to gain support for AI
adoption. Highlighting the positive impact of AI on ESG, including improved financial
performance and sustainability metrics, can generate stakeholder buy-in.
By considering these practical implications, governments, policymakers, and firm managers can
harness the potential of AI adoption to drive ESG performance and contribute to sustainable
development. These implications are particularly relevant in the Chinese context, where there is a
growing emphasis on eco-friendly innovation and transitioning to a sustainable growth model.
6.2 Limitation and Future studies

Our study acknowledges its limitations and illuminates pathways for future investigations, as prior
research had yet to explore the association between AIA and firms ESG performance. Firstly, our
study's scope is confined to Chinese A-share listed firms, which, despite our efforts to mitigate
sampling bias through robustness tests, may hinder a comprehensive understanding of the study.
We examined the impact of AI and ESG on different types of ownership, including SOEs and non-
SOEs, as well as specific types of SOEs. Our findings indicate that SOEs experience greater
benefits in terms of AI adoption and ESG performance compared to non-SOEs. However, it is
important to consider that unlisted firms, if provided with better opportunities, may also exhibit
unique characteristics and financial performance. Furthermore, our sample may not fully capture
the diverse range of industries and sectors in China, potentially compromising the
representativeness of our findings. To overcome this limitation, future studies should endeavor to
replicate our results while encompassing unlisted firms, which would foster a more comprehensive
analysis across a wider spectrum of industries.
Secondly, a noteworthy concern revolves around the measurement of Artificial Intelligence (AIA)
in our study. We employed a CATA (Computer-Aided Text Analysis) approach, specifically
focusing on the MD&A sections of 10-K filings. Nevertheless, it is essential to acknowledge that
firms may strategically present a socially desirable narrative in their public corporate statements,
including the MD&A section, which may limit our insights into the actual utilization of AIA within
these firms. To address this limitation, future research should employ alternative methodological
approaches to enhance the robustness of our findings. Longitudinal case studies that delve into
firms actively leveraging AIA for ESG purposes could provide a more profound understanding of
the phenomenon. Additionally, a structured scale development process, combining qualitative and
quantitative approaches, could be pursued to establish a comprehensive measurement instrument

for AIA. Such an approach would enable researchers to apply and triangulate different
measurement techniques, thereby augmenting the validity of our results. Lastly, we must
acknowledge the contextual limitations of our study, which focuses on Chinese companies. Given
the unique characteristics of the Chinese digital market and environmental regulations, generically
of our findings to other geographical contexts may be constrained. Consequently, we encourage
the replication and extension of our research in diverse countries worldwide to explore the
applicability of our results in different settings. This would foster a more comprehensive
understanding of the relationship between AIA and ESG practices across nations and facilitate
cross-cultural comparisons, enriching our knowledge in this field.
6.3 Conclusion
In this study, we examine the effects of artificial intelligence adoption (AIA) on Environmental,
Social, and Governance (ESG) practices, using principal agent theory, resource-based view theory,
and signaling theory as the foundation of our research. Through empirical analysis, we investigate
how AIA influences overall ESG performance and its three sub-dimensions: environmental
performance, social performance, and the quality of governance. By drawing on these theories, we
aim to gain a deeper understanding of the relationship between AIA and ESG practices in
organizations. Through an analysis of a sample of A-share listed companies from 2010-2020, our
findings demonstrate the significant impact of AIA implementation on improving firm ESG
performance. This underscores the importance of leveraging technological advancements to
enhance sustainability practices. Furthermore, our study reveals that the influence of AIA on ESG
performance is more pronounced in SOEs compared to non-state enterprises, indicating the
government's active involvement in promoting digitalization and sustainable development.
Specifically, the relationship is particularly strong in central SOEs, suggesting the central
government's role in driving the digital economy and fostering ESG practices. Importantly, our
study findings are robust and consistent across various statistical approaches, including 2SLS,
PSM, SysGMM, and instrumental variable analysis. These methodological robustness checks
provide confidence in the reliability and validity of our results. Overall, this study contributes to
the growing body of literature on the intersection of AIA and ESG performance. The findings
highlight the need for businesses to embrace AIA as a tool for driving sustainability and advocate
for supportive policies that encourage its adoption. Additionally, policymakers and government

officials should recognize the critical role of AIA in advancing ESG goals and collaborate with
relevant stakeholders to harness its potential for sustainable development.

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Driving Sustainable Development: The Impact of Artificial Intelligence on Environmental,

Social, And Governance (ESG) Performance

Keywords: Artificial intelligence, ESG, Environmental, Social, Governance, Ownership, types

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Adoption of Artificial Intelligence in firm operation over the years

AIA SOEs Non-SOEs Linear (Non-SOEs)

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Electronic copy available at: https://ssrn.com/abstract=4519204

Electronic copy available at: https://ssrn.com/abstract=4519204

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Electronic copy available at: https://ssrn.com/abstract=4519204

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4.1 Data and sample

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4.2 Variable measurement:

4.2.1 Dependent variable measurement: ESG

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4.2.2 Independent variable: Artificial intelligence adoption

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4.2.4 Measurement of the control variable

Table 1: Variable definition and explanation

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𝐸𝑆𝐺!" = α + β# 𝐴𝐼𝐴$% + β& 𝑋!" + 𝜔'()* + 𝜔+,-./"*' + 𝜀!" … … 𝐸𝑞. (1)

𝐸𝑆𝐺!" = α + β# 𝐴𝐼𝐴$% + β& TYP$% + β0 𝐴𝐼𝐴$% × TYP$% + β0 𝑋!" + 𝜔'()* + 𝜔+,-./"*'

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Table 2: Summary statistics

5.2 Correlation matrix

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Table 4: Effects of artificial intelligence adoption on ESG and its components.

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5.3.2 Addressing Persistent Firm Characteristics

Table 5: Artificial intelligence adoption and ESG performance: Change Regression

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5.3.2 AIA and ESG: SOEs vs Non_SOEs

5.3.3 AIA and ESG: Type of SOEs (Local vs Central)

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5.4.1 Propensity score matching (PSM)

Table 8: PSM Regression results

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treated control treated control

5.4.2 Two-step system GMM

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4.4.3 Two-stage least square 2SLS

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Table 10: Two stage least square analysis

Section II: Second stage

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6. Discussion and Conclusion

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6.2 Limitation and Future studies

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