1 s2.0 S0927538X23000859 Main

Pacific-Basin Finance Journal 79 (2023) 102019
Contents lists available at ScienceDirect
Pacific-Basin Finance Journal

journal homepage: www.elsevier.com/locate/pacfin
Digital finance and corporate ESG performance: Empirical

evidence from listed companies in China☆
Xiaohang Ren a, Gudian Zeng a, Yang Zhao b, *
a
School of Business, Central South University, Changsha, China
b
Chinese Academy of Finance and Development, Central University of Finance and Economics, Beijing, China
A R T I C L E I N F O A B S T R A C T
Keywords: With the continuous development of digital technology, the digital economy has gradually
Digital financial inclusion become a vital driver of global economic growth. We investigate the impact of digital finance on
Corporate performance corporate ESG performance using panel data of Chinese A-share listed firms from 2011 to 2020.
ESG performance
First, we find that digital finance can significantly promote corporate ESG performance, especially
Green innovation
environmental and social performance. Second, we empirically identify that digital finance affects
corporate ESG performance through green innovation and external supervision. Third, our het
erogeneity analysis shows that digital finance has a more pronounced impact on firms with low
digitalization and low profitability, and firms in regulated industries and high carbon emission
industries. The positive effect of digital finance is more pronounced for firms in central and
western regions and non-low carbon pilot cities. Finally, our results remain robust after
addressing endogeneity issues and conducting a series of robustness checks.
1. Introduction
In recent years, global climate disasters have prompted countries around the world to pay more attention to the serious challenges
arising from environmental problems (Wang et al., 2022). The concept of sustainable development has increasingly become a broad
consensus, which is also gradually transferred to the economic sector. Therefore, the ESG concept, which fits the current economic and
social development context, has received widespread attention from both academic and practical circles (Gillan et al., 2021).
ESG is the collective expression of Environment, Social and Governance. It is an expansion and enlargement of responsible in
vestment and green investment (Pedersen et al., 2021). ESG performance is an essential indicator of corporate sustainability. In 1992,
the United Nations Environment Programme (UNEP) raised the hope that ESG performance should be incorporated into the decision-
making process of financial institutions. Currently, a lot of institutions publish ESG disclosure systems (Husted and de Sousa, 2019).
Numerous studies have been conducted based on ESG data published by exchanges, including the impact of ESG investments on
corporate financial performance (Wang and Sarkis, 2017), financing costs (Chang et al., 2021), and innovation capacity (Dong et al.,
2022). There are a number of studies that verify the economic benefits of ESG investments from different perspectives (Broadstock
et al., 2021; Duque-Grisales and Aguilera-Caracuel, 2021; Feng et al., 2022; Li et al., 2018; Ren et al., 2023a), but few pay attention to
the influencing factors of corporate ESG performance. This study attempts to answer the question of how firms can achieve sustainable
☆
The research is supported by the the Natural Science Fund of Hunan Province (2022JJ40647) and Key Projects of National Social Science
Foundation of China “Realization mechanism and policy insurance of carbon peak and carbon neutrality in manufacturing industry” (22AZD095).
* Corresponding author.
E-mail addresses: domrxh@outlook.com (X. Ren), yangzhao@cufe.edu.cn (Y. Zhao).
https://doi.org/10.1016/j.pacfin.2023.102019
Received 20 December 2022; Received in revised form 19 March 2023; Accepted 27 March 2023
Available online 28 March 2023
0927-538X/© 2023 Elsevier B.V. All rights reserved.
X. Ren et al. Pacific-Basin Finance Journal 79 (2023) 102019
development by exploring the impact factors of corporate ESG performance.

Firm performance cannot be separated from the influence of the external economic environment. As the lubricant of the real
economy, the role of finance on corporate performance is self-evident (Broadstock et al., 2021). With the application of digital
technology in finance, corporate financing has been greatly facilitated (Li et al., 2020). Firms can use financing cost savings for ESG
investment. Moreover, several studies have empirically confirmed the contribution of digital finance to environmental improvement at
the city and regional levels (Dong et al., 2022; Ma et al., 2022; Wang et al., 2022; Wang et al., 2023a). Accordingly, this study pro
pounds the hypothesis that digital finance can enhance the ESG performance of firms.
Theoretically, the development of digital technology can largely reduce the transaction cost (Ahluwalia et al., 2020) and the cost to
obtain information (Goldfarb and Tucker, 2019). As a result, firms can save some financing and information costs. These savings may
be used for environmental, social and governance investments. At the same time, digital finance can improve the quality of corporate
information disclosure (Yee et al., 2018) and increase the transparency of corporate governance. This facilitates external monitors to
keep an eye on corporate dynamics and avoid problems such as financial fraud as much as possible. Under the condition of financial
digitalization, the concern of external supervisors on environmental performance can also be translated into managers’ attention to
ESG issues timely (Nambisan et al., 2019).
Based on the theoretical analysis, the study conducts a series of empirical analysis to test the above hypothesis. First, we conduct
our empirical research on the Chinese A-share listed firms from 2011 to 2020. The Digital Financial Inclusion Index published by
Peking University (Guo et al., 2020) is used to designate digital finance development, and the ESG score published by Bloomberg
Information is selected as an alternative variable for ESG performance. Second, we adopt the fixed effects model to verify the impact of
digital finance on corporate ESG performance. The moderating effect model is adopted to explore the mechanism through which
digital finance affects corporate ESG performance. Furthermore, we employ the difference-in-differences (DID) model and instru
mental variables method to address potential endogeneity problems. Finally, we analyze the heterogeneous effect of digital finance on
ESG performance at the firm, industry and regional levels. We also investigate the role of three sub-indicators of digital finance to
provide an analytical basis for policymakers and authorities to make decisions.
Our main findings are as follows: (1) An improvement in digital finance can significantly improve the ESG performance of Chinese
listed firms. Specifically, the contribution of digital finance to the environment and governance performance is more significant than
the social performance. (2) Our mechanism analysis indicates that digital finance can indirectly influence corporate ESG performance
by accelerating corporate green innovation and increasing the attention of external monitors. (3) Our heterogeneity analysis dem
onstrates that digital finance affects low digital and low profitability firms more substantially. And firms in regulated industries, in
dustries with high carbon emissions, and listed firms in western and central regions and non-low-carbon pilot cities benefit more. (4)
Analysis from specific indicators of digital finance. The depth of usage and digitization can significantly contribute to ESG perfor
mance, but the role of coverage breadth is not obvious. Therefore, government departments and financial institutions should accelerate
the construction of digital infrastructure and broaden digital finance application scenarios to promote sustainable corporate
development.
The possible contributions of this study are summarized as follows: (1) At the theoretical level, ESG performance has almost never
been studied as an outcome variable in the existing literature. This study fills the gap in this research perspective by exploring the
factors that affect corporate ESG performance. (2) At the practical level, this study creatively approaches from the perspective of micro
enterprises, verifies the role of digital finance on corporate sustainability, and proves the green value and social benefits of digital
finance. This provides theoretical support for deepening the reform of the digital economy.
There are two major innovations in this study: (1) In terms of the impact mechanism, this study explores the transmission path of
the impact of digital finance on ESG performance, which provides ideas for further refinement of the study of digital finance and
corporate environmental performance. (2) From the perspective of the research object, this study selects Chinese listed firms as the
research object. China has developed rapidly in the digital economy in the last decade, focusing on and promoting the development of
inclusive finance (Li et al., 2020), and has achieved significant results. The development journey of digital finance in China is of great
reference. Second, as the world’s largest carbon emitter, China has an obligation to contribute to global “carbon neutrality” (Ren et al.,
2022; Wang et al., 2022; Wang et al., 2023b). Therefore, focusing on the ESG performance of Chinese firms can help China and other
developing countries achieve the goal of “carbon reduction” and explore the path of sustainable development.
The remainder of the study is organized as follows: Section 2 discusses the theoretical framework and research hypotheses. Section
3 outlines the empirical methodology. Section 4 analyzes the main empirical results. Section 5 conducts the mechanism analysis and
heterogeneity analysis. Section 6 summarizes the main conclusions and policy recommendations.
2. Literature review and hypothesis development
2.1. Digital finance and corporate ESG performance
Many scholars study the economic effects and social benefits of digital finance from macro perspective (Goldfarb and Tucker, 2019;
Liu et al., 2022; Wang et al., 2022; Ren et al., 2023b). For example, some studies empirically clarify its poverty reduction effect
(Kelikume, 2021). Digital finance is inclusive and conducive to promoting allocation equity (Mohd Daud et al., 2021). Some scholars
have also analyzed the impact of digital finance on banking industry (Gomber et al., 2017), financial risks (Yuhui and Zhang, 2022),
financial stability (Ozili, 2018), and financial innovation (Manta, 2017) from the perspective of financial evolution. Overall, the
development of digital finance has intensified the competition among banking industries (Houston and Shan, 2022) and increased
financial stability (Goldfarb and Tucker, 2019). However, the use of digital technology in the financial sector also brings new financial
2
risks (Yuhui and Zhang, 2022), and the regulatory system needs to be accelerated and upgraded.
On the basis of exploring the economic benefits of digital finance, scholars also incorporate the concept of sustainable development
into their research and analyze the correlation between digital inclusive finance and diversified economic indicators such as green total
factor productivity (Liu et al., 2022), green technological innovation (Nambisan et al., 2019), and green economic efficiency. In
addition, some scholars also study the social benefits of digital finance purely from the perspective of resources and environment. For
instance, Wang et al. (2022) investigate the causality between digital financial inclusion and carbon emissions, and discover that the
spatial spillover effect of digital finance can substantially decrease carbon emissions in peripheral areas. Dong et al. (2022) analyze the
role played by inclusive financial development in alleviating energy poverty.
Although the macroeconomic impact of digital finance have been investigated from multiple perspectives in the literature, few
studies have been conducted on its microeconomic impact (Jiang et al., 2022). Only a few studies have been analyzed from the
perspective of household consumption structure (Li et al., 2020) and residents’ income. In the case of corporate finance, a few studies
address the effect of digital finance on corporate innovation capacity (Jiang et al., 2022) and economic performance (Nirino et al.,
2021). Chang et al. (2021) demonstrate that digital finance and ESG performance can significantly contribute to corporate financing
efficiency. Beyond this, few studies concentrate on the impact of digital finance on the environmental performance and sustainability
of firms.
On the other hand, most of the current empirical studies on corporate ESG performance focus on the economic benefits of ESG
investment, but few articles have explored the impact factors of ESG (Drempetic et al., 2020; Huang et al., 2022). Scholars have
verified that ESG investment can (1) significantly enhance corporate value (Wong et al., 2021)and operating performance; (2) reduce
financing costs and improve corporate investment efficiency; and (3) promote corporate innovation and reduce systemic risk (Baker
et al., 2021). After verifying the importance of corporate ESG investment, it is worthwhile to further consider what factors affect ESG
performance and how to further improve corporate operating efficiency and achieve sustainable development by enhancing ESG
performance. This study explores digital finance and corporate ESG performance to answer these questions. Before conducting the
empirical analysis, the following hypothesis is proposed to be tested.
Hypothesis 1. Digital finance can significantly improve corporate ESG performance.
2.2. Mechanism of digital finance affecting ESG performance
The objective of this study is not only to clarify the relationship between corporate ESG and digital finance, but also to explore the
impact mechanisms between them. Mu et al. (2023) argue that digital finance increases corporate ESG investment by reducing their
financing constraints, thus enhancing ESG performance. On the one hand, digital finance can reduce the information asymmetry
between banks and firms, which helps banks evaluate firms more efficiently and thus accelerate the corporate financing. On the other
hand, the development of digital finance also provides more financing sources for firms, such as fintech firms. The more capital firms
can obtain from stakeholders, the more they can increase ESG inputs and thus improve ESG performance. The mechanism role of
financing constraints in ESG performance research has been well documented by previous scholars (Cheng et al., 2014; Krueger et al.,
2020; Zhang, 2022).
Based on the previous analysis, this study further innovatively proposes two possible mechanisms for digital finance to influence
ESG performance: green innovation and external monitoring. Green innovation refers to green product innovation and process
innovation concerning energy saving, environmental protection and recycling of waste to cope with environmental problems (He et al.,
2020). First, the development of digital finance has largely reduced the financing cost of firms. In particular, the small, medium and
micro enterprises with financing difficulties can benefit from it (Ahluwalia et al., 2020). These firms are the important subjects of green
innovation (Papadopoulos et al., 2020). With the savings in financing costs, firms have more abundant funds for R&D and innovation.
Second, the development of digital technology provides a convenient information exchange platform (Sutherland and Jarrahi, 2018).
It can reduce the cost of external information search and alleviate the negative impact of information asymmetry on firms. Further
more, it can boost firms’ enthusiasm for green innovation. Last but not least, the advancement of digital technology creates oppor
tunities for technology exchange and joint R&D among firms, which is beneficial to promote cooperative innovation (Jiang et al.,
2022).
On the other hand, sustainable development and environmental protection, which are the focus of green innovation, are also key
elements in measuring corporate ESG performance. There is a naturally positive correlation between them. For instance, new products
(or technologies) developed by a firm that involve energy saving, pollution control, resource recycling, etc., can improve its envi
ronmental and social performance. As a result, we further propose the following hypothesis:
Hypothesis 2. Digital finance can improve corporate ESG performance through green innovation.
The development of digital technology and its application in the financial sector has largely reduced market transaction costs and
information costs. In spite of listed firms, regulators and investors are also important participants in the financial market and are
equally dependent on information access to make decisions (Edwards, 1977). Therefore, the development of digital finance can not
only trim firms’ financing cost, but also improve the efficiency of supervision by investors and creditors, etc. Among the many su
pervisors, accounting firms, which are responsible for auditing the financial statements of listed firms, and institutional investors,
which have the advantage of information acquirement, rely on information the most (Wong and Zhang, 2022). Therefore, it is
reasonable to assume that digital finance can improve the audit efficiency of accounting firms and the decision-making efficiency of
institutional investors. This study categorizes the attention from accounting firms and institutional investors as external monitoring.
3
On the other hand, accounting firms1 and institutional investors (Amel-Zadeh and Serafeim, 2018) are more concerned about
environmental performance and sustainability programs relative to the general public (Cheng et al., 2014). If the concern from outside
increases (e.g., an increase in the share of institutional investors), firms are more likely to be required to make environmental dis
closures. Then firms’ attention to environmental and social issues will increase. Corporate managers will focus on improving ESG
performance to meet the expectations of external monitors and even to attract more external investment. As a result, the following
hypothesis is logically proposed.
Hypothesis 3. Digital finance can improve corporate ESG performance by enhancing the efficiency of external supervision.
Fig. 1 summarizes the above theoretical analysis and research hypotheses. The hypothesis testing process will be elaborated in the
empirical analysis section.
3. Methodology and data
3.1. Model specifications
Based on the above research hypotheses, this study employs panel data of Chinese A-share listed firms to conduct the empirical
analysis. First, the fixed-effects model is adopted to conduct the baseline regression and investigate the relationship between digital
financial inclusion and the ESG performance of listed firms. The baseline model is set as follows:
ESGit = α1 + α2 DFIICit + αc Xit + μi + δt + εit (1)
where ESGit denotes the ESG performance of listed firm i in year t, and DFIICit indicates the level of digital finance in the city where firm
i is registered. Xit is the set of control variables, which is mainly composed of financial indicators of listed firms. δt and μi denote time
(year) fixed effects and individual (firm) fixed effects, respectively, and εit is the random error term. α1, α2 and α3 are the parameters to
be estimated in the regression, where α2 characterizes the marginal impact of digital finance on the dependent variable.
This study adopts a baseline regression to analyze the direct impact of digital financial inclusion on ESG accomplishment.
Furthermore, the moderating effects models are conducted to explore the mechanism of the effect between the key variables, which is
set up as follows:
ESGit = β1 + β2 DFIICit + βm Mit + β3 DFIICit *Mit + βc Xit + μi + δt + εit (2)
where Mit is the potential moderating variable and the meanings of other variables remain unchanged. This study uses Invent to proxy
for green technology innovation and Big4 and INST to measure external supervision, thus further exploring the mechanism of the role
of digital finance on firm ESG performance. If β3 is significant, the moderating effect is proved.
While the above models all employ a continuous variable to characterize digital finance, the findings obtained based on the above
models may be challenged due to the ignorance of potential endogeneity problems. Therefore, the difference-in-differences (DID)
model is adopted for robustness check to concisely perceive the causality between corporate ESG performance and digital financial
inclusion. Upon investigation, this study selects the exogenous policy shock of network infrastructure upgrading in the demonstration
cities of the Broadband China Strategy2 to positively reflect the development of digital finance (Li et al., 2022).
The State Council of China launched the “Broadband China” strategic plan in 2013, and selected 39 cities (clusters) as the
demonstration cities in each year from 2014 to 2016, with 117 cities being incorporated into the list in batches. This study therefore
sets the continuous DID model as follows:
ESGit = θ1 + θ2 Policyi × Postit + θc Xit + μi + δt + εit (3)
where Policyi represents the policy shock of “Broadband China”. If the city where firm i is located is a demonstration city, the variable
takes the value of 1, otherwise it equals 0. And if the city where firm i located is included in the list of demonstration cities before (or in)
year t, Postit takes the value of 1, otherwise it equals 0. The meaning of other variables remains unchanged.
3.2. Variable selection
3.2.1. Dependent variables

This study focuses on the ESG performance of listed firms, which is an essential aspect to gauge corporate performance in addition
to financial indicators. Many studies employ the scores (ratings) of third-party agencies as a representative of corporate ESG per
formance (Eliwa et al., 2021; Gillan et al., 2021; Xie et al., 2019). These agencies mainly construct indicator systems, assign different
weights to different indicators, and then sum up to get ESG scores (ratings) for different firms. For example, Bloomberg and STOXX use
1
The U.S. Sustainability Accounting Standards Board (SASB has been strive to integrate ESG-related sustainability indicators into accounting
standards. The “GRI Guidelines” launched by Global Reporting Initiative (GRI) have become the reference standard for ESG disclosures in many
countries around the world.
2
The State Council of China launched a “Broadband China” Strategy and Implementation Plan”on17 August,2013, with the purpose of optimizing
network infrastructure construction and increasing Internet penetration.
4
Fig. 1. Conceptual framework.

Note: Hypothesis 1: Digital finance can significantly improve corporate ESG performance. Hypothesis 2: Digital finance can improve corporate ESG
performance through green innovation. Hypothesis 3: Digital finance can improve corporate ESG performance by enhancing the efficiency of
external supervision. (For interpretation of the references to colour in this figure legend, the reader is referred to the web version of this article.)
indicators such as carbon emission intensity, water utilization efficiency, and soil pollution to represent environmental performance,
and whether or not they have an emission reduction policy and renewable energy policy to measure a firm’s ability to deal with
environmental risks. In addition, some Chinese scholars use the social responsibility reports of firms to demonstrate ESG performance
(Cheng et al., 2014; Wang and Sarkis, 2017). Since this indicator is too one-dimensional to measure, researchers prefer the ESG rating
data released by Shanghai Huazheng Index Information Service Company (hereinafter referred to as the Huazheng Index; available in
the Wind database). This rating classifies all A-share listed firms into nine grades (specifically AAA, AA, A, BBB, BB, B, CCC, CC, C) from
four aspects: comprehensive rating, environmental performance, social responsibility, and governance performance. The ESG eval
uation system of Beijing SynTao Green Finance includes both a 10-grade ESG rating system from A+ to D and an ESG score system from
0 to 100 (available in the CSMAR database).
In this study, Bloomberg’s ESG scores are selected to represent the ESG performance of listed firms based on the requirements of
analysis and data availability. Moreover, the ESG rating data of the Huazheng Index are used for robustness check. The specific
evaluation system of Bloomberg is shown in Table 1. All ESG scores are divided by 100 to keep the same magnitude as other variables,
and then incorporated into the model for analysis.
3.2.2. Key explanatory variables

This study adopts the “Digital Financial Inclusion Index of China”3 launched by Peking University (Guo et al., 2020) to characterize
digital finance. The index consists of one composite indicator (DFIIC) and three sub-indicators (Degree of digitalization, Depth of usage
and Breadth of coverage). It is necessary to point out that this study focuses on listed firms, but the DFIIC data have not been refined to
the firm level. Therefore, we rely on the DFIIC data of the city where the firm is registered to characterize the level of digital financial
development of the firm. In addition, to make all variables at a comparable level, this study divides all DFIIC indices by 100 before
including them in the model.
3.2.3. Control variables

There exist various factors influencing the ESG performance of listed firms, and this study first considers firm-level influencing
factors.
(1) Firm size (Size). This variable is measured by the logarithm of a firm’s total assets and reflects the operational scale and market
competitiveness of the firm. It is a fundamental factor that affects all decisions of the firm, including ESG commitment and ESG
disclosure, and should be incorporated into the control variables first (Drempetic et al., 2020).
3
Specific indicators and measurements of the Digital Inclusive Finance Index of Peking University are available at https://idf.pku.edu.cn/docs/
20210421101507614920.pdf.
5
Table 1
Bloomberg ESG scoring system.
Pillar (Weight) Topic Weight
Environmental (33%) Air Quality 4.78%

Climate Change 4.70%
Ecological & Biodiversity Impacts 4.79%
Energy 4.73%
Materials & Waste 4.74%
Supply Chain 4.79%
Water 4.79%
Social (33%) Community & Customers 5.53%
Diversity 5.49%
Ethics & Compliance 5.57%
Health & Safety 5.58%
Human Capital 5.55%
Supply Chain 5.54%
Governance (33%) Audit Risk & Oversight 4.17%
Board Composition 4.16%
Compensation 4.16%
Diversity 4.17%
Independence 4.18%
Nominations & Governance Oversight 4.18%
Sustainability Governance 4.18%
Tenure 4.18%
Note:The weighted average of the environmental, social and governance scores is the corporate ESG score.
(2) Leverage ratio (Lev). This variable is measured by the ratio of a firm’s total liabilities to its total assets and reveals the firm’s
ability to access external funds. This indicator also provides a sidelight on the level of risk exposure of the firm, which can
further affect the firm’s ESG performance (Apergis et al., 2022).
(3) Return on Assets (ROA). This variable is measured by the ratio of a firm’s net profit to total assets and reflects the profitability
of the firm. A higher indicator indicates that the firm is performing well in terms of increasing revenue and saving money, which
contribute to the ESG performance of the firm.
(4) Tobin’s Q value (TobinQ). This variable is defined as the ratio of a firm’s market value to its replacement cost and is an
important indicator which is often used as a gauge of a firm’s performance and growth.
(5) State-Owned Enterprise (SOE). SOEs are enterprises controlled by the central government of a country. The volition of the
government determines the behavior of SOEs. Therefore, the difference in ESG performance between SOEs and non-SOEs can
reflect the government’s requirements for environmental regulation and social responsibility of firms (Khalid et al., 2021). SOE
takes the value of 1 if a firm is a state-owned enterprise and 0 otherwise.
(6) Shareholding structure (Top1 & Mshare). The shareholding ratio of the top shareholder and the proportion of management
ownership are selected to reflect the characteristics of the equity structure of the firm. The shareholding structure can reflect the
composition of the firm’s decision-makers, which has a significant impact on the firm’s ESG performance (Cucari et al., 2018).
(7) Financial risk (Occupy). We employ the capital appropriation of major shareholders to reflect the potential financial risk faced
by firms. Due to the transfer of capital of listed firms by major shareholders through the internal capital market, the firm’s cash
flow is reduced, which increases the firm’s financial risk and may negatively influence its ESG performance (Chen et al., 2022).
A firm’s ESG performance is not only associated with its financial characteristics, but is also influenced by the economic envi
ronment in which it is located.
(1) Regional economic development (PGDP). This study employs the economic performance of the province where the firm
located as a control variable and incorporated into the regression for robustness check. Gross domestic product per capita (RMB
yuan/person) is deflated to constant prices in 2011, and then logarithmically processed to obtain the proxy variable for regional
economic development (PGDP).
(2) Economic policy uncertainty (EPU). Considering the influence of economic policy uncertainty on the operational decisions of
firms (He et al., 2020; Shi et al., 2020), this study refers to the quantitative approach of Baker et al. (2016) and includes the EPU
index of the province where the firm located into the model to reflect the macroeconomic risk facing the firm.
(3) Regional industrial structure (INDst). In addition to the scale of economic development and the risk of policy changes, the
industrial structure of a region has a significant impact on a firm’s performance in environmental and social aspects (Al Amosh
and Khatib, 2021). We select the ratio of the output value of tertiary industry to secondary industry at the provincial level to
represent the industrial structure (INDst).
6
3.2.4. Mechanism variables
(1) Green innovation (Invent). In the previous literature, scholars mainly adopt the following measurements to disclose green
innovation capacity at the firm level: scale design, number of green patent applications, and number of green patents granted.
However, scale design is subjective, while the authorization cycle of green patent is long (3–5 years) and has great volatility and
uncertainty. Therefore, this study adopts the number of green patent applications as a proxy variable for green innovation.
Furthermore, considering the category of patents in China consists of invention patents and utility patents. Since invention
patents have more stringent requirements for innovation and pre-grant examination, they are more representative of the
authentic innovation ability than utility patents. Based on this, this study finally adopts the number of green invention patent
applications to characterize the green innovation capability of firms.
(2) External supervision (Big4 & INST). As society’s concern for environmental quality generally increases, public demands and
expectations for firms to perform their social responsibility increase. This external attention can motivate firms to increase their
ESG investments and improve their environmental and social performance. External supervision may come from government
regulation on the one hand, and accounting firms on the other hand, which are responsible for auditing the financial statements
and ESG disclosure reports of listed firms. Compared to local accounting firms, international Big 4 accounting firms have a more
standardized audit process and provide more supervision to firms. Therefore, if a listed firm is audited by a Big 4, it means that
the firm faces more stringent external supervision. Besides, institutional investors pay more attention to the ESG performance of
a firm compared to ordinary shareholders. They can exercise their voting rights or have more board seats through the share
holders’ meeting to influence the ESG investment decisions of the firm. Therefore, this study uses the shareholding percentage
of institutional investors as an alternative proxy variable for external monitoring.
3.3. Data description and sources
3.3.1. Data description

This study takes A-share listed firms in China from 2011 to 2020 as the primary sample and performs the following screening: (i)
excludes listed firms in the financial sector and real estate industry; (ii) excludes firms with abnormal trading status such as ST, *ST, PT,
etc.; and (iii) excludes firms with missing or abnormal ESG data and digital finance index. After screening, the sample contains 1005
firms (the number of excluded firms due to incomplete ESG data is high), and 7249 annual observations of firms are reserved.
Moreover, all continuous variables in the model are winsorized at the 1% and 99% levels to alleviate the interference of extreme
outliers on the regression results.
3.3.2. Data sources

The ESG score data employed in this study is obtained from Bloomberg, and the ESG rating results are from the Wind database. The
Table 2
Descriptive statistics of key variables.
Role Variables Obs Mean Sd. D. Min Max
Dependent variables ESG 7249 0.219 0.061 0.120 0.442

Environ 7249 0.108 0.074 0.023 0.411
Social 7249 0.248 0.090 0.070 0.563
Govnce 7249 0.452 0.051 0.339 0.589
Key independent variables DFIIC 7249 2.366 0.887 0.297 4.103
Bread 7249 2.178 0.870 0.185 3.847
Depth 7249 2.354 0.918 0.381 4.399
Digit 7249 3.010 1.098 0.212 4.622
Control variables Size 7249 23.145 1.298 20.470 26.217
Lev 7249 0.482 0.197 0.075 0.868
ROA 7249 0.047 0.056 − 0.145 0.209
TobinQ 7118 1.814 1.090 0.855 6.967
SOE 7249 0.538 0.499 0.000 1.000
Top1 7249 0.374 0.159 0.090 0.742
Mshare 6978 0.069 0.145 0.000 0.621
Occupy 7247 0.015 0.021 0.000 0.129
PGDP 7205 11.116 0.454 9.706 12.009
EPU 7205 0.234 0.171 0.001 0.863
INDst 7205 0.400 0.102 0.160 0.620
Mechanism variables INST 7249 0.504 0.221 0.017 0.880
Big4 7249 0.124 0.330 0.000 1.000
Invent 7249 0.338 0.787 0.000 3.970
Utility 7249 0.254 0.652 0.000 3.296
Uncertain 6747 0.131 0.129 0.002 1.547
Inner 7194 6.361 0.966 0.000 6.904
Note: The specific meanings of the variables are shown in the Appendix. From the statistical results, all variables take reasonable values and there are
no extreme outliers.
7
X. Ren et al.
Table 3
Correlation analysis.
ESG DFIIC Size Lev ROA SOE TobinQ Top1 Mshare Occupy
ESG 1.000
DFIIC 0.179*** 1.000
Size 0.411*** 0.162*** 1.000
Lev 0.132*** − 0.038*** 0.537*** 1.000
8
ROA 0.000 − 0.051*** − 0.080*** − 0.446*** 1.000

SOE 0.176*** − 0.064*** 0.306*** 0.230*** − 0.172*** 1.000
TobinQ − 0.168*** − 0.004 − 0.462*** − 0.432*** 0.341*** − 0.222*** 1.000
Top1 0.130*** − 0.084*** 0.265*** 0.102*** 0.060*** 0.327*** − 0.125*** 1.000
Mshare − 0.123*** 0.029** − 0.304*** − 0.253*** 0.182*** − 0.467*** 0.166*** − 0.196*** 1.000
Occupy − 0.032*** 0.054*** 0.133*** 0.228*** − 0.130*** − 0.052*** − 0.071*** − 0.072*** 0.002 1.000
Note: *** indicates that the correlation coefficient is significant at the 1% level while ** represents the 5% level of significance.
Pacific-Basin Finance Journal 79 (2023) 102019

digital finance index is derived from Peking University. Financial data of listed firms are from CSMAR (China Stock Market & Ac
counting Research) database. Macroeconomic data are collected from the National Bureau of Statistics, China Statistical Yearbook and
EPS database. Green innovation data are from WIPO (World Intellectual Property Organization) Green Patent List and the State In
tellectual Property Office.
4. Empirical results
This section will focus on the baseline regression results and verifies the trustworthiness of the baseline results through several
robustness checks. Before conducting the baseline regressions, descriptive statistics and correlation analysis are first conducted to
confirm that the data are not abnormal and that no multicollinearity exists. After the baseline regression, this study performs
robustness check by controlling for macroeconomic variables, replacing key variables, excluding large cities and provincial capitals,
DID model, and instrumental variables method.
4.1. Baseline regression
4.1.1. Descriptive statistics

The results of descriptive statistics for all variables are tabulated in Table 2. Among them, the maximum and minimum values of
each ESG score differ widely, indicating that the environmental, social, and governance performance of different firms vary sub
stantially. The measures of digital financial development, on the other hand, exhibit small mean values and large standard deviations.
Other control variables also differ to varying degrees. Overall, the statistical results show that the data have no significant outliers and
that all variables are in the same order of magnitude.
4.1.2. Correlation analysis

Table 3 summarizes the magnitude and significance levels of the correlation coefficients of the key variables of interest in this
study. The results show that the correlation coefficients between almost all variables are much smaller than 0.5, indicating that there is
no strong correlation, thus preventing errors in the estimation brought by multicollinearity. From the correlation coefficients of ESG
and each variable, it can be tentatively determined that there are positive relationships between ESG and digital finance index, firm
size, leverage ratio, SOEs, and shareholding of the first largest shareholder, and significant negative correlation with Tobin’s Q,
management shareholding, and capital appropriation by major shareholders. However, the specific causality between ESG perfor
mance and digital finance needs to be further studied.
4.1.3. Baseline results

Table 4 summarizes the empirical results obtained based on model (1), where columns (1)–(4) inspect the influence of digital
financial inclusion on the aggregate ESG indicators and three important sub-indicators of firms without considering the control
variables. Columns (5)–(8) present the results of regressions with control variables. The estimated coefficients of DFIIC indicate that
digital finance can significantly improve to the overall corporate ESG performance. Specifically, the environmental and social per
formance of listed firms is substantially improved by the development of digital finance where the firm is located, while corporate
governance performance is not significantly affected by digital finance.
This may be attributed to the fact that the investment in environmental governance and social responsibility is mainly targets to the
external environment, and thus is more obviously affected by changes in the external market environment (Christensen et al., 2022).
For example, the improvement of digital infrastructure can create a more convenient information exchange platform for listed firms,
which helps them to obtain information faster so that they can quickly launch financial assistance or research related products
(Sutherland and Jarrahi, 2018). Corporate governance performance, on the other hand, is mainly expressed in the efficiency of internal
corporate governance and management, which is relatively lagged by the improvement of the external environment, and therefore the
impact of DFIIC on governance is not significant.
In addition, the investment of listed firms in areas such as environmental governance and social responsibility has positive ex
ternalities, which can slow down further environmental degradation and improve the level of social welfare (Broadstock et al., 2021).
Accordingly, digital finance can not only promote corporate governance performance, but also has the potential to radiate this positive
effect to other areas and promote the overall sustainable development of society.
The estimated coefficients of other control variables indicate that (1) all else being equal, the larger the firm, the better the ESG
performance. This may be explained by the fact that larger firms are relatively well capitalized, more mature in their development, and
willing and able to focus on environmental and social responsibility issues beyond financial performance (Papadopoulos et al., 2020).
(2) The higher the Tobin’s Q, the better the overall ESG performance of listed firms. Tobin’s Q is often used to measure the performance
and growth of firms. This result indicates that firms with better financial performance also perform better in terms of environmental
and social responsibility. (3) ESG performance is higher for listed firms with higher percentage of ownership by the first largest
shareholder. Since most of the listed firms’ first major shareholders are institutional investors or state-owned capital. And compared
with individual investors or ordinary shareholders, state-owned capital and institutional investors will concentrate more to envi
ronmental sustainability. Therefore, they are willing to support greater environmental and social investment in corporate decision
making. In addition, Mshare mainly reflects the voting privileges of management in major decisions. As the actual operators of a firm,
management is more aware than ordinary shareholders of how the firm should realize its social value. As a result, firms with higher
equity concentration tend to have better ESG performance. (4) The higher the proportion of capital occupied by major shareholders,
9
Table 4
Results of baseline regressions.
(1) (2) (3) (4) (5) (6) (7) (8)
ESG Environ Social Govnce ESG Environ Social Govnce
DFIIC 0.021** 0.033** 0.042*** − 0.001 0.021** 0.037*** 0.038** − 0.003

(2.25) (2.45) (2.75) (− 0.11) (2.30) (2.74) (2.55) (− 0.43)
Size 0.009*** 0.010*** 0.015*** 0.002
(3.56) (3.14) (4.04) (0.96)
Lev − 0.014 0.003 − 0.034*** − 0.027***
(− 1.63) (0.29) (− 2.86) (− 4.11)
ROA 0.015 0.015 0.026 0.002
(1.03) (0.81) (1.09) (0.19)
SOE 0.006 0.006 0.016** − 0.004
(1.53) (1.04) (2.57) (− 0.92)
TobinQ 0.003*** 0.004*** 0.002* − 0.001
(3.00) (3.80) (1.92) (− 1.24)
Top1 0.032*** 0.036** 0.022 0.025**
(2.84) (2.36) (1.40) (2.20)
Mshare 0.047*** 0.057*** 0.039** 0.045**
(3.67) (4.08) (2.18) (2.36)
Occupy − 0.097*** − 0.127*** − 0.107* − 0.061**
(− 2.94) (− 2.82) (− 1.87) (− 2.04)
Constant 0.169*** 0.029 0.149*** 0.454*** − 0.064 − 0.240*** − 0.199** 0.416***
(7.55) (0.90) (4.16) (26.67) (− 1.03) (− 3.10) (− 2.22) (8.22)
Firm FE YES YES YES YES YES YES YES YES
Year FE YES YES YES YES YES YES YES YES
R2 0.777 0.722 0.764 0.781 0.784 0.728 0.773 0.787
N 7233 7233 7233 7233 6826 6826 6826 6826
Note: Columns (1)–(4) show the regression results when no other variables are controlled, while columns (5)–(8) control for firm-level factors that
may affect ESG performance. The regression results indicate that digital finance can significantly improve corporate ESG performance, especially
environmental and social performance. ***, **, and * denote 1%, 5%, and 10% significance levels, respectively. The meanings of the symbols in the
following tables are the same.
the worse the ESG performance of listed firms. This is because each firm has limited funds at its disposal, and if a large amount of funds
is appropriated by major shareholders, the funds available for environmental protection and social responsibility are bound to be
squeezed.
Synthesizing the above findings, we can get the following policy insights: the improvement of corporate ESG performance can be
achieved through the development of digital finance in the macroeconomic environment, in addition to the expansion of firm scales
and internal monitoring mechanisms.
4.2. Robustness checks
4.2.1. Controlling for macroeconomic factors

In the baseline regressions, only the relevant indicators at the firm level are controlled for, but the factors affecting corporate ESG
performance should include macroeconomic factors (Gillan et al., 2021). Based on previous researches (Apergis et al., 2022; Eliwa
et al., 2021; Li et al., 2018), this study employs GDP per capita (PGDP) to characterize the level of economic development, economic
policy uncertainty (EPU) to measure policy risk. The ratio of tertiary industry output to secondary industry output (INDst) to denote the
industrial structure. This study matches the above three provincial-level economic variables to all listed firms by year and province
where the firm is registered, and yields further empirical results as shown in Panel A in Table 5.
The coefficients of DFIIC in Table 5 show that digital finance can still significantly contribute to corporate ESG performance after
considering the influence of macroeconomic factors. And weak negative relationships are exhibited between corporate ESG perfor
mance and macroeconomic factors.
4.2.2. Replacing key variables

The corporate ESG performance in the baseline regressions is measured using ESG scores launched by Bloomberg. This study
further conducts the regression using the ESG ratings of listed firms published by Huazheng Index. The ratings are adopted as an
alternative proxy variable for the dependent variables, assigning a score of 1–9 to each of the nine rating results from C to AAA. The
regression result after replacing the key variables is exhibited in column (1) of Panel B in Table 5. The parameters of DFIIC indicates
that digital finance can influence corporate ESG performance positively, but this impact is not significant. The difference in signifi
cance may be due to the fact that the ESG rating categorizes all listed firms into nine classes and may ignore the differences in ESG
performance of different firms in practice. In contrast, the Bloomberg score used in the baseline regression evaluates different firms
individually based on an objective scoring system, which is more systematic of the substantive differences between firms.
10
Table 5
Results of robustness checks.
Panel A: After controlling the macroeconomic factors.
(1) (2) (3) (4)
ESG Environ Social Govnce
DFIIC 0.021** 0.036*** 0.041** 0.004

(2.22) (2.75) (2.54) (0.53)
PGDP − 0.006 − 0.008 − 0.010 − 0.011
(− 0.54) (− 0.57) (− 0.66) (− 1.50)
EPU − 0.007* − 0.009 − 0.010* 0.002
(− 1.71) (− 1.64) (− 1.93) (0.66)
INDst − 0.040 − 0.004 − 0.127* − 0.010
(− 0.90) (− 0.06) (− 1.79) (− 0.24)
Constant 0.015 − 0.146 − 0.058 0.524***
(0.13) (− 1.00) (− 0.37) (5.93)
Controls & Firm FE & Year FE YES YES YES YES
R2 0.785 0.728 0.773 0.787
N 6786 6786 6786 6786
Panel B: Results after replacing key variables and DID regression results.
(1) (2) (3) (4) (5)
HZ ESG Environ Social Govnce
DFIIC 0.267
(1.26)
Policyi × Postit 0.003 0.001 0.009*** 0.003
(1.14) (0.23) (2.73) (1.11)
Constant 0.696 − 0.017 − 0.162** − 0.116 0.411***
(0.54) (− 0.29) (− 2.24) (− 1.39) (8.53)
Controls & Firm FE & Year FE YES YES YES YES YES
R2 0.661 0.784 0.727 0.773 0.787
N 6798 6816 6816 6816 6816
Panel C: Results after excluding municipalities and capital cities
(1) (2) (3) (4)
DFIIC 0.028* 0.053** 0.007 0.002

(1.67) (2.22) (0.27) (0.18)
Constant − 0.058 − 0.261** − 0.104 0.410***
(− 0.65) (− 2.42) (− 0.80) (5.58)
R2 0.731 0.683 0.734 0.768
N 3343 3343 3343 3343
Panel D: Robustness check: IV method
(1) (2) (3) (4)
Dep. Var= DFIIC ESG DFIIC ESG
Stage 1st 2nd 1st 2nd

DFIIC 0.139** 0.099***
L.DFIIC 0.173***
F.Internet − 0.961***
Constant 2.389*** − 0.131 1.396*** 0.208***
R2 0.997 0.857 0.997 0.850
N 3196 3196 3209 3209
F-statistics in 1st stage 827.26 6059.26
Note: The results of all robustness checks corroborate the reliability of the baseline regression results.
4.2.3. Continuous DID analysis

To alleviate the interference of potential endogeneity problem, the DID model is used to further verify the causal relationship
between digital finance and corporate ESG performance. Referring to Li et al. (2022), the demonstration cities of “Broadband China
11
Strategy” are employed as a positive external shock to digital transformation of finance. Then the interaction term Policyi × Postit is
included into the DID model for analysis, and the results are shown in columns (2)–(5) of Panel B in Table 5. From the parameter of the
interaction term, it is clear that although the impact of “Broadband China Strategy” on the environmental and governance performance
of listed firms is not significant, the policy does significantly promote their social performance. This also supports the results of baseline
regressions.
4.2.4. Excluding municipalities and capital cities

Considering that the level of digital finance is much higher in mega cities and provincial capitals than in other prefecture-level
cities, this study re-runs the regressions after excluding these cities to eliminate the bias on the overall estimation. And the estima
tion results are shown in Panel C of Table 5. It is evident that the overall ESG performance can be prominently boosted by digital
finance. Specifically, digital finance can substantially enhance the environmental performance, but has little impact on social and
governance performance.
4.2.5. Instrumental variables method

In the previous empirical analysis, there may exist endogeneity problem from omitted variables or sample selection. For example,
different regions may have peculiarities in the identification of the relationship between digital finance and corporate ESG due to
differences in resource endowments and development stages. But these factors are difficult to be fully considered. Therefore, this study
Table 6
Results of mechanism analysis.
Panel A: Invent and Big4 as mechanism variables
(1) (2) (3) (4)
DFIIC*Invent 0.005*** 0.007*** 0.004** 0.002*

(3.86) (4.10) (2.21) (1.70)
DFIIC*Big4 0.020*** 0.030*** 0.018*** 0.004*
(6.25) (6.10) (4.24) (1.70)
DFIIC 0.006 0.013 0.024 − 0.007
(0.61) (1.02) (1.60) (− 0.90)
Invent 0.000 − 0.000 0.003 − 0.001
(0.24) (− 0.06) (1.49) (− 1.14)
Big4 0.011 0.009 0.014 0.009**
(1.60) (0.96) (1.55) (1.99)
Constant − 0.031 − 0.182** − 0.120 0.404***
(− 0.53) (− 2.58) (− 1.43) (8.41)
Controls YES YES YES YES
Firm FE YES YES YES YES
Year FE YES YES YES YES
R2 0.797 0.746 0.777 0.788
N 6826 6826 6826 6826
Panel B: Invent and INST as mechanism variables
(1) (2) (3) (4)
DFIIC*Invent 0.006*** 0.010*** 0.005*** 0.002

(4.69) (5.15) (2.76) (1.62)
DFIIC*INST 0.028*** 0.034*** 0.029*** 0.018***
(7.17) (6.59) (4.87) (4.62)
DFIIC 0.014 0.027** 0.030** − 0.008
(1.53) (2.10) (2.10) (− 1.08)
Invent 0.000 − 0.000 0.003 − 0.001
(0.23) (− 0.08) (1.50) (− 1.13)
INST 0.018*** 0.025*** 0.013 0.009*
(3.24) (3.34) (1.50) (1.69)
Constant − 0.006 − 0.144** − 0.102 0.410***
(− 0.10) (− 2.01) (− 1.20) (8.58)
Controls YES YES YES YES
Firm FE YES YES YES YES
Year FE YES YES YES YES
R2 0.794 0.740 0.777 0.791
N 6826 6826 6826 6826
Note: This study uses Invent to proxy for green technology innovation and Big4 and INST to measure external supervision, thus further exploring the
mechanism of the role of digital finance on firm ESG performance.
12
adopts instrumental variables (IV) method to further eliminate the interference of endogeneity problem. Reasonable and effective
instrumental variables need to satisfy both relevance and exogeneity principles. This study follows Li et al. (2020) and selects the
lagged period of local digital finance development and the advanced period of local Internet penetration as instrumental variables.
Firstly, to illustrate the relevance, the digital finance can never be dissociated from the upgrade of Internet infrastructure, while the
Internet penetration can well reflect urban digitalization level. Moreover, the correlation between the instrumental variables and the
error terms in the model estimation can be ignored. And the historical Internet penetration can hardly affect current corporate ESG
performance. The exogeneity of instrumental variables is thus satisfied.
The regression results of the IV method are shown in Panel D in Table 5. The results in columns (1) and (3) reveal that the
instrumental variables L. DFIIC and F. Internet are prominently correlated with digital finance expansion. The results in column (2) and
(4) indicate that digital finance can substantially improve ESG performance at the 5% (or even 1%) significance level, which verifies
the robustness of the baseline regression results. In addition, in the examination of “weak instrumental variable identification”, the F-
statistic is much larger than 10, which resist the original hypothesis of “weak instrumental variable”. In the check of “insufficient
instrumental variable identification”, the p-values of LM statistics are all significant at the 10% significance level, and the null hy
pothesis is rejected. This justifies the choice of instrumental variables in this study.
5. Further analysis
This section will focus on the mechanism and heterogeneity analysis of digital financial inclusion on ESG achievement. The
mechanism will be analyzed in terms of green innovation and external monitoring. The heterogeneity analysis will spotlight the impact
of different factors on the correlation between digital finance and corporate ESG performance at the firm level, industry level, and
regional level.
5.1. Mechanism analysis
5.1.1. Green innovation

The regression results derived from the moderating effects model based on Eq. (2) are shown in Table 6. It can be concluded from
Table 6 that the coefficients of DFIIC*Invent are all significantly positive (except for Govnce). This indicates that green technology
innovation is one of the mechanisms by which digital financial inclusion affects the ESG performance of firms. For firms with high
innovation capacity, the financing facilities brought by digital finance can accelerate the transformation and application of green
innovation results in protecting the environment and fulfilling social responsibility. Therefore, digital finance can contribute to
Table 7
Results of heterogeneity analysis.
Panel A: Firm-level heterogeneity
Category High-digit Low-digit Mature Growing High-ROA Low-ROA.
(1) (2) (3) (4) (5) (6)
Dep. Var= ESG ESG ESG ESG ESG ESG

DFIIC 0.007 0.037*** 0.020** 0.069* 0.004 0.026**
(0.57) (2.91) (2.07) (1.94) (0.29) (2.21)
Constant − 0.086 − 0.073 − 0.087 − 0.046 − 0.163 0.001
(− 1.10) (− 0.81) (− 1.35) (− 0.22) (− 1.59) (0.01)
Controls YES YES YES YES YES YES
Firm FE YES YES YES YES YES YES
Year FE YES YES YES YES YES YES
R2 0.857 0.773 0.795 0.852 0.795 0.823
N 3234 3405 6154 597 3346 3285
Panel B: Industry-level heterogeneity & regional heterogeneity
Category Regulation Competition High-carbon Low-carbon Cent & West East Non-pilot Pilot
(1) (2) (3) (4) (5) (6) (7) (8)
Dep. Var= ESG ESG ESG ESG ESG ESG ESG ESG
DFIIC 0.044*** 0.012 0.029* 0.019 0.036* 0.012 0.056** 0.009
(2.89) (0.99) (1.93) (1.60) (1.83) (0.98) (2.10) (0.75)
Constant − 0.001 − 0.226*** − 0.121 − 0.048 − 0.126 − 0.005 − 0.087 0.037
(− 0.01) (− 2.87) (− 1.19) (− 0.65) (− 1.13) (− 0.06) (− 0.63) (0.49)
Controls YES YES YES YES YES YES YES YES
Firm FE YES YES YES YES YES YES YES YES
Year FE YES YES YES YES YES YES YES YES
R2 0.820 0.762 0.780 0.789 0.729 0.804 0.707 0.816
N 2407 4357 3229 3597 2032 4754 1545 4075
Note: There are significant group differences in all grouping except for mature and growth firms.
13
corporate ESG performance by accelerating green technology innovation and the application of results.
5.1.2. External supervision

According to the results of Table 6, the moderating effects of both Big 4 and INST are significant at the 1% level of significance. This
suggests that digital finance can enhance ESG performance by strengthening external supervision. And the role played by institutional
investors’ supervision is more significant than that of accounting firms’ supervision. Since the auditors that listed firms cooperate with
usually do not change frequently, but there is room for fluctuation in the percentage of their institutional investors’ shareholding.
Therefore, the impact of institutional investors’ decision changes on listed firms’ ESG performance is more visible in reality. Thus, the
role played by external monitoring in the process of digital finance affecting corporate ESG performance is validated.
5.2. Heterogeneity analysis
Since China is a vast country with huge differences in natural geographic conditions and economic development levels in different
regions, the influence of digital financial inclusion on ESG achievement of distinct firms may vary greatly. Through heterogeneity
analysis, this study can inspect the causality between corporate ESG achievement and digital financial inclusion more thoroughly, so as
to better promote sustainable corporate development.
5.2.1. Firm-level heterogeneity

In this study, the samples are categorized into the following groups according to the characteristics of listed firms: (1) High digital
group (marked as High-digit) and low digital group (marked as Low-digit) based on the level of digital transformation; (2) Mature and
growing groups according to the years of firm establishment; (3) High profitability group (labeled as High-ROA) and low profitability
group (labeled as Low-ROA) based on their return on net assets (ROA). The results of the subgroup regressions are exhibited in Table 7
Panel A. From the regression coefficients of DFIIC, the promotion effect of digital finance on low digital and low profitability firms is
significant, but the effect on high digital and high profitability firms is not significant. This suggests that the government can take full
advantage of the development of digital finance to facilitate the digital transformation of listed firms, and thus improve their ESG
performance. Furthermore, the government can leverage the role of these firms to radiate the positive impact of digital finance to the
whole society and promote environmental protection and sustainable economic development. Finally, there is little difference in the
influence of digital finance on mature and growing firms.
5.2.2. Industry-level heterogeneity

First, the industry competition may affect the external transaction costs of upstream and downstream firms in the industry
(Acemoglu, 2010), which in turn affects the ESG performance of firms. Therefore, the contribution of digital finance to corporate ESG
performance may differ significantly depending on the degree of industry competition. Based on the above analysis and with reference
to the methodology of Edwards (1977), this study divides the sample firms into regulated and competitive firms4 based on the type of
industry in which the listed firms reside. The outcome of this subgroup regression is demonstrated in columns (1) and (2) of Panel B of
Table 7, respectively. The results reveal that digital financial inclusion contributes significantly to the ESG achievement of regulated
firms, but competitive firms are not obviously affected by digital finance. The possible reason for this is that regulatory firms are more
likely to be required to disclose ESG information and therefore pay more attention to their ESG performance and are therefore more
affected by digital finance.
In addition, there is a higher public expectation for ESG disclosure in highly polluting industries. The ESG performance of these
firms will also receive more attention from investors and regulators. Therefore, this study divides the sample firms into high-emission
and low-emission firms based on carbon emission intensity, and performs regression analysis in groups. The regression outcomes are
presented in columns (3) and (4) of Panel B in Table 7. The results demonstrate that the ESG performance of high-emission industries is
enhanced more significantly by the impact of digital finance. Similar to regulated firms, firms with high carbon emissions face more
stringent environmental regulations and environmental disclosure requirements and therefore focus more on ESG investments. Firms
are more strongly positively influenced by this change when the external environment improves (e.g., financial digitization). This
explains why digital finance does not have a strong impact on low-emission firms.
5.2.3. Regional heterogeneity

First, in terms of geographical location, the economic development and digital finance in eastern China (East) is much higher than
that in the central and western regions (Cent & West), so this study divides the firms into East and Cent & West firms based on the
geographical location of the listed firms. Second, China has been implementing low-carbon city pilot policies since 2010. In low-carbon
pilot cities, certain regulations to limit carbon emissions will require firms to disclose their environmental performance. Therefore,
listed firms in the pilot cities will pay more attention to ESG performance. In this study, all samples are divided into pilot and non-pilot
firms according to whether the cities are low-carbon pilot cities. The regression results after grouping are shown in columns (5)–(8) of
Panel B in Table 7.
The empirical results show that the promotion of digital financial inclusion to ESG achievement is significant in the western and
4
Specifically, industries with industry codes B, C25, C31, C32, C36, C37, D, E48, G53, G54, G55, G56, I63, I64, K, and R under the SEC’s Industry
Classification (2012 Edition) are defined as regulated industries, while other industries are considered competitive industries.
14
central regions, but not in the east. This may be explained by the fact that the financial service develops relatively slowly in the central
and western regions, and the development of digital finance greatly facilitates the financing process of listed firms, thus enabling
greater investment in ESG. In the eastern region, where the financial sector is booming, the effect of digital finance may not be as
significant (like icing on the cake). The difference proves the effect of digital finance in facilitating balanced regional development.
Firms in economically disadvantaged areas should seize the opportunity of digital finance development, establish ESG disclosure
systems, and strive to improving ESG performance.
The results in columns (7) and (8) suggest that digital finance works more efficiently among firms in non-low-carbon pilot cities.
This may be attributed to the fact that low-carbon pilot cities may have some compulsory environmental regulations and thus firms
themselves attach great importance to ESG disclosure. That is to say, for firms with higher ESG performance initially, the facilitating
role of digital finance is limited.
5.3. Analysis of sub-indicators
Digital finance includes three main sub-indicators: degree of digitization, depth of usage, and breadth of coverage. To explore the
different effects of sub-indicators of digital financial on ESG achievement, we conduct separate regressions with digital finance
composite indicators and sub-indicators, and the results are displayed in Table 8. The estimation outcome reveals that the main factors
affecting ESG performance are the depth of usage and the degree of digitization, while the breadth of coverage plays an insignificant
role. Therefore, government departments and financial institutions should accelerate the construction of digital infrastructure and
develop more application scenarios for digital finance.
6. Conclusion and policy implications
In recent years, issues such as climate change and environmental degradation have not only posed enormous risks to business
operations, but have also brought crisis awareness to society in general (Brovkin et al., 2013). Environmental awareness has gradually
become a determinant in investment decisions (Krueger et al., 2020) and is gradually becoming the focus of public attention (Tang and
Zhang, 2020). The market environment in China is now also placing higher demands on corporate ESG performance. First, firms face
regulatory and policy pressures to improve their ESG performance (Li et al., 2020). For instance, the Environmental Protection Law
(2015 revised version) has further increased environmental fees and taxes for firms. Second, financial institutions, represented by
commercial banks, are placing higher expectations on firms for green investment and financing (Amel-Zadeh and Serafeim, 2018;
Wong and Zhang, 2022). At present, major commercial banks and financial institutions in China have established a green credit system
and implemented a strict access system for industries with high pollution and emissions. Third, Chinese investors are increasingly
demanding higher standards for ESG disclosure. How to guide the market to increase investment in green industry, as well as how to
make firms consciously enhance the ability of sustainable development has become a common concern of industry and academia.
In this study, we examine whether and how digital finance affects corporate ESG performance using panel data of Chinese A-share
listed firms from 2011 to 2020. Our study has four important findings as follows. First, our baseline analysis reveals that the devel
opment of digital finance can significantly improve corporate ESG performance, especially environmental and social performance.
Second, the mechanism analysis indicates that digital financial inclusion influences ESG performance by enhancing its green inno
vation capability and the attention of external monitors. Third, the heterogeneity analysis results show that the impact of digital
finance on ESG performance is more pronounced for firms with low digitalization and low profitability, and for firms in regulated
industries and high carbon emission industries. In addition, digital financial inclusion contributes more to firms in the western and
Table 8
Analysis of digital finance sub-indicators.
(1) (2) (3) (4) (5) (6) (7) (8)
ESG ESG ESG ESG ESG ESG ESG ESG
DFIIC 0.021** 0.021**

(2.25) (2.30)
Bread 0.019 0.013
(1.16) (0.80)
Depth 0.010* 0.009*
(1.93) (1.88)
Digit 0.006* 0.008**
(1.69) (2.35)
_cons 0.169*** 0.178*** 0.196*** 0.202*** − 0.064 − 0.045 − 0.036 − 0.041
(7.55) (5.03) (16.40) (19.76) (− 1.03) (− 0.65) (− 0.60) (− 0.68)
Controls No No No No Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes Yes Yes
R2 0.777 0.777 0.777 0.777 0.784 0.784 0.784 0.784
N 7233 7233 7233 7233 6826 6826 6826 6826
Note: The regression results reveal that the depth of usage and the degree of digitization have significant effects on corporate ESG performance, but
the breadth of coverage has a minor role.
15
central regions and non-low-carbon pilot cities. Finally, our results remain robust after addressing endogeneity issues and conducting a
series of robustness checks.
According to the above findings, the following policy implications are concluded: (1) Firms should seize the opportunities created
by the development of digital finance and establish an ESG information disclosure system. They should properly understand the
importance of ESG investment and pay attention to the synergistic development among environment, society and governance. (2)
Regulators can establish a reasonable ESG mandatory information disclosure system and incorporate ESG performance into the reg
ulatory framework. It should guide firms to engage in environmentally friendly investment and financing behaviors, and play the role
of financial institutions in promoting sustainable development. On the other hand, authorities and financial institutions should pay
attention to the establishment of digital infrastructure and the deepening the application of digital finance in economically under
developed regions. The government should bring into play the synergy and mutual promotion effects of inclusive finance and green
finance. (3) Investors should fully consider the ESG performance of companies when making investment decisions. As extreme climate
disasters can be a disaster for firms, paying attention to the environmental performance of firms can reduce their investment risks.
Corporate sustainability is a reliable way to ensure long-term returns for investors.
This study comprehensively analyzes the relationship between digital finance and corporate ESG performance within the existing
theoretical framework and data availability. However, due to the early stage of ESG disclosure and the lack of ESG data by many listed
firms, the available data of this study have some limitations. In addition, we examine the mechanism through which digital finance
affects corporate ESG performance. There may be a number of other possible channels through which digital finance may have an
impact on ESG performance. Future studies can be conducted from the perspective of financing costs, mandatory environmental in
formation disclosure system, and government environmental regulation. Finally, while this study focuses on the improvement that
digital finance brings to firms’ ESG performance, it would also be worthwhile to explore the positive impact of digital finance on firms’
financial and operational performance. All of these issues above are worth exploring in depth in the future study.
CRediT authorship contribution statement
Xiaohang Ren: Conceptualization, Methodology, Data curation, Software, Formal analysis, Writing – original draft, Writing –
review & editing. Gudian Zeng: Methodology, Data curation, Software, Formal analysis, Writing – original draft, Writing – review &
editing. Yang Zhao: Conceptualization, Writing – original draft, Writing – review & editing.
Appendix A. Variable definitions
Role Variables Definition Source
Dependent vairable Govnce Corporate governance performance Bloomberg & Huazheng ESG Evaluation
Social Social responsibility performance System
Environ Environmental performance
ESG ESG Performance
Key independent variable DFIIC Digital financial inclusion index of China Digital Finance Center of Peking University
Bread Breadth of coverage
Depth Depth of usage
Digit Digitalization level
Control variable Size Measured by the logarithm of total assets Wind Database & CSMAR Database
Lev Leverage ratio: measured as total liabilities over total assets
ROA Return On Assets: measured by net profit over total assets
TobinQ Tobin’s Q = market value of the company/replacement cost of assets
SOE State-owned enterprise or not
Top1 Ownership of the first largest shareholder
Mshare Shareholdings of management
Occupy Major shareholders’ capital appropriation
PGDP Logarithm of GDP per capita National Statistical Yearbook of China
EPU Economic Policy Uncertainty
INDst Industrial structure: Share of secondary industry output in GDP
Mechanism variable Invent Number of green invention patent applications WIPO Green Patent List
Utility Number of green utility patent applications
Inner Internal control index of DIB DIB company
Big4 Whether audited by Big 4 accounting firm Wind Database
INST Shareholding ratio of institutional investors
Appendix B. Nomenclature
The meaning of the abbreviated expressions used in this study is as follows.
16
DFIIC Digital Financial Inclusion Index of China

ESG The collective expression of Environment, Social and Governance
UNEP United Nations Environment Programme
DID Difference-in-differences model
R&D Research and development
CSMAR China Stock Market & Accounting Research
EPS Economy prediction system
ST Special treatment
PT Particular transfer
IV Instrumental variables
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Pacific-Basin Finance Journal 79 (2023) 102019

Contents lists available at ScienceDirect

Pacific-Basin Finance Journal

Digital finance and corporate ESG performance: Empirical

development by exploring the impact factors of corporate ESG performance.

2. Literature review and hypothesis development

2.1. Digital finance and corporate ESG performance

2.2. Mechanism of digital finance affecting ESG performance

3. Methodology and data

3.1. Model specifications

3.2. Variable selection

3.2.1. Dependent variables

Fig. 1. Conceptual framework.

3.2.2. Key explanatory variables

3.2.3. Control variables

Environmental (33%) Air Quality 4.78%

3.2.4. Mechanism variables

3.3. Data description and sources

3.3.1. Data description

3.3.2. Data sources

Dependent variables ESG 7249 0.219 0.061 0.120 0.442

ROA 0.000 − 0.051*** − 0.080*** − 0.446*** 1.000

Pacific-Basin Finance Journal 79 (2023) 102019

4.1. Baseline regression

4.1.1. Descriptive statistics

4.1.2. Correlation analysis

4.1.3. Baseline results

ESG Environ Social Govnce ESG Environ Social Govnce

DFIIC 0.021** 0.033** 0.042*** − 0.001 0.021** 0.037*** 0.038** − 0.003

4.2. Robustness checks

4.2.1. Controlling for macroeconomic factors

4.2.2. Replacing key variables

(1) (2) (3) (4)

ESG Environ Social Govnce

DFIIC 0.021** 0.036*** 0.041** 0.004

(1) (2) (3) (4) (5)

HZ ESG Environ Social Govnce

Panel C: Results after excluding municipalities and capital cities

(1) (2) (3) (4)

ESG Environ Social Govnce

DFIIC 0.028* 0.053** 0.007 0.002

Panel D: Robustness check: IV method

(1) (2) (3) (4)

Dep. Var= DFIIC ESG DFIIC ESG

Stage 1st 2nd 1st 2nd

4.2.3. Continuous DID analysis

4.2.4. Excluding municipalities and capital cities

4.2.5. Instrumental variables method

(1) (2) (3) (4)

ESG Environ Social Govnce

DFIIC*Invent 0.005*** 0.007*** 0.004** 0.002*

Panel B: Invent and INST as mechanism variables

(1) (2) (3) (4)

ESG Environ Social Govnce

DFIIC*Invent 0.006*** 0.010*** 0.005*** 0.002

5.1. Mechanism analysis

5.1.1. Green innovation

Category High-digit Low-digit Mature Growing High-ROA Low-ROA.

(1) (2) (3) (4) (5) (6)

Dep. Var= ESG ESG ESG ESG ESG ESG

Panel B: Industry-level heterogeneity & regional heterogeneity

(1) (2) (3) (4) (5) (6) (7) (8)

5.1.2. External supervision

ROA 0.000 − 0.051* − 0.080* − 0.446*** 1.000

DFIIC 0.021 0.033 0.042* − 0.001 0.021 0.037* 0.038 − 0.003

DFIIC 0.021 0.036* 0.041** 0.004

DFIICInvent 0.005 0.007* 0.004** 0.002*

DFIICInvent 0.006 0.010* 0.005*** 0.002

DFIIC 0.021 0.021