How Do ESG Ratings Affect a Company’s Ability of Green Innovation?

This paper investigates the causal impact of ESG ratings coverage on corporate green innovation ability based on firm-year level panel data for Chinese A-share listed firms from 2014 to 2023. A novel green innovation index is constructed using the entropy weight method to represent green innovation ability, which integrates both input and output dimensions to comprehensively reflect substantive innovation. Employing a multi-period Difference-in-Differences (DID) model, complemented by Propensity Score Matching (PSM) and an Instrumental Variable (IV) approach to rigorously address endogeneity, the findings reveal that being covered by ESG ratings significantly enhances corporate green innovation capacity. Mechanism analyses indicate that this positive effect is mainly through alleviating financing constraints and improving information transparency. Heterogeneity analysis demonstrates that the positive impact is more pronounced in non-state-owned enterprises and non-heavily polluting industries.