Environmental Science and Pollution Research

How Digital Finance and Corporate ESG Ensures Environmental Transition in China?
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Full Title: How Digital Finance and Corporate ESG Ensures Environmental Transition in China?

Article Type: Research Article

Keywords: Digital finance; ESG; Transition; Carbon emission; Industries

Corresponding Author: Minghan Wang

University of Birmingham
UNITED KINGDOM

Corresponding Author Secondary

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Corresponding Author's Institution: University of Birmingham

Corresponding Author's Secondary

Institution:

First Author: Jiehua Zhong

First Author Secondary Information:

Order of Authors: Jiehua Zhong

Minghan Wang

Xuanyi Liu

Xuanzhi Yang

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Abstract: The digital economy has emerged as a critical factor in boosting economies worldwide
as digital technology has advanced. We investigate the impact that digital finance has
on the environmental, social, and governance (ESG) performance of Chinese A-share
listed businesses by using panel data spanning the years 2011 and 2020. To begin,
our research reveals that ESG performance, particularly social and environmental
performance, may stand to gain greatly from the use of digital finance. Second, we use
empirical evidence to determine that green innovation and external monitoring are two
ways digital finance impacts corporations' ESG performance. Third, according to the
results of our research on heterogeneity, businesses that have low levels of digitization
and profitability, as well as companies operating in regulated industries and high-
carbon emission fields, are the most negatively affected by digital finance. The
favorable impacts of digital banking are likely to be felt most strongly by companies in
the western and central parts of the country, as well as in non-low carbon pilot cities.
Last but not least, we have dealt with endogeneity concerns and performed a battery of
robustness tests, and our findings have stayed the same.

Suggested Reviewers: He Dan

Jiangsu University of Technology
[email protected]

Sajid Iqbal
UMT: University of Management and Technology
[email protected]

Azer Dilanchiev
International Black Sea University
[email protected]

Opposed Reviewers: Eyup Dogan

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Zhihong Xu

Conflict of Interest

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Cover Letter

16 OCT 2023

Editor-in-Chief

Environmental Science and Pollution Research

Subject: “How Digital Finance and Corporate ESG Ensures Environmental Transition in China?”

Dear Sir,

It is submitted that, the abovementioned manuscript entitled “How Digital Finance and Corporate ESG
Ensures Environmental Transition in China?” is originally written in all aspects and submitted for the
possible publication in Environmental Science and Pollution Research. We confirm that we have given due
consideration to the protection of intellectual property associated with this work and that there are no
impediments to publication, including the timing of publication, with respect to intellectual property. In so
doing we confirm that we have followed the regulations of our institutions concerning intellectual property.
We wish to confirm that there are no known conflicts of interest associated with this publication.
The manuscript has been submitted to preprint server before submission.

Minghan Wang
Manuscript Click here to access/download;Manuscript;Manuscript.docx

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1 How Digital Finance and Corporate ESG Ensures Environmental

2 Transition in China?
3

4 Jiehua Zhong 1, Minghan Wang 2*, Xuanyi Liu 3, Xuanzhi Yang4

5 1.Faculty of Humanities and Social Sciences,Macao Polytechnic University,Macao 999078,China
6 2.University of Birmingham,College of Social Sciences,B15 2TT,United Kingdom
7 3.Faculty of Business,Hong Kong Chu Hai College,Hong Kong,999077,China
8 4. College of business, Yancheng Teachers University, Yancheng,Jiangsu,224000,China

9 Email address list： [email protected] , [email protected] , [email protected],

10 [email protected]

11 Corresponding Author: Minghan Wang

12 Abstract

13 The digital economy has emerged as a critical factor in boosting economies worldwide as digital
14 technology has advanced. We investigate the impact that digital finance has on the environmental,
15 social, and governance (ESG) performance of Chinese A-share listed businesses by using panel
16 data spanning the years 2011 and 2020. To begin, our research reveals that ESG performance,
17 particularly social and environmental performance, may stand to gain greatly from the use of
18 digital finance. Second, we use empirical evidence to determine that green innovation and external
19 monitoring are two ways digital finance impacts corporations' ESG performance. Third, according
20 to the results of our research on heterogeneity, businesses that have low levels of digitization and
21 profitability, as well as companies operating in regulated industries and high-carbon emission
22 fields, are the most negatively affected by digital finance. The favorable impacts of digital banking
23 are likely to be felt most strongly by companies in the western and central parts of the country, as
24 well as in non-low carbon pilot cities. Last but not least, we have dealt with endogeneity concerns
25 and performed a battery of robustness tests, and our findings have stayed the same.
26 Keywords: Digital finance, ESG, Transition, Carbon emission, Industries

27 1. Introduction

28 Natural catastrophes worldwide have increased awareness of the substantial difficulties

29 environmental issues pose in many nations in recent years (Ikram et al., 2020). The notion of

30 sustainable development is gaining widespread support and slowly entering the business world.

31 Thus, the ESG concept has attracted much interest from academic and practical circles since it is

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32 relevant to the present economic and social development setting (Caldeira dos Santos & Pereira,

33 2022). To sum up Environment, Social, and Governance, we use the acronym ESG. It's a way to

34 broaden and deepen the practice of ethical and environmentally friendly finance. Evidence

35 suggests that ESG performance is a crucial gauge of a company's long-term viability. The UN

36 Environment Program (UNEP) first advocated including ESG performance in financial

37 institutions' decision-making in 1992. Several organizations have recently released ESG disclosure

38 frameworks (Siew, 2015).

39 The influence of ESG investments on business financial performance, financing costs, and

40 innovation capability are only some of the topics that have been studied using ESG data released

41 by exchanges. While many studies have confirmed the financial benefits of ESG investments from

42 various angles (Hachenberg & Schiereck, 2018), (Hachenberg & Schiereck, 2018), and

43 (Hachenberg & Schiereck, 2018), the elements that determine business ESG performance have

44 received comparatively little attention. The authors of this research set out to investigate the

45 elements that affect a company's ESG performance to provide an answer to the topic of how

46 businesses may contribute to sustainable development.

47 The external economic climate has a significant impact on company performance. The impact of

48 finance, the engine oil of the actual economy, on business results is noticeable (Tan et al., 2022).

49 Utilizing digital technologies has substantially simplified company financing. Businesses may

50 reinvest the money they save on finance into environmental, social, and governance projects. The

51 beneficial effects of digital money on the surroundings of local and regional communities have

52 also been empirically shown and supported by study (Da Costa & Popović, 2020). Following these

53 results, the idea is proposed that financial technology has the potential to improve the governance,

54 social, and environmental performance of businesses.

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55 Transaction costs and information costs should be drastically reduced as digital technology

56 advances. This results in reduced financial and data expenditures for businesses. Environmental,

57 social, and government investments might benefit from these cost reductions. Meanwhile, digital

58 finance may boost the reliability of corporate information disclosure and open up corporate

59 governance (Wang et al., 2022). This makes it easier for third-party auditors to monitor how a

60 company operates and spot red flags, such as probable financial malfeasance. Financial digitization

61 has made it possible for external supervisors' worries about environmental performance to prompt

62 timely ESG attention from management (Z. Chen et al., 2022).

63 The research uses theoretical analysis to examine the abovementioned hypothesis via several

64 empirical analyses. We begin with an empirical study of A-share listed companies in China from

65 2011 to 2020. The ESG score from Bloomberg Information is a replacement variable for ESG

66 performance. While this was going on, Peking University's Digital Economic Inclusion Index was

67 being published (Wu & Huang, 2022) is utilized to denote digital finance progress. In the second

68 step of our analysis, we apply a model with fixed effects to determine whether or not the adoption

69 of digital finance has an impact on the ESG performance of companies. The moderating effect

70 model is used to get a deeper understanding of the ways in which digital finance influences the

71 ESG performance of companies. In addition, we deal with the possibility of endogeneity by using

72 the difference-in-differences (DID) model and the instrumental variables approach. Last but not

73 least, we look at how digital finance might affect ESG performance at the company, sector, and

74 country levels. We also examine the function of three economic technology sub-indicators to

75 provide policymakers and academics a solid data base from which to develop their studies.

76 Here are our research highlights: (1) The ESG performance of Chinese-listed enterprises may

77 benefit greatly from advancements in digital finance. In particular, digital money has a more

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 78 significant impact on environmental and governance performance than social performance. By

79 raising external monitors' focus and hastening corporate green innovation's pace, based on our

80 understanding of the mechanisms at play, Indirectly, digital money may affect the ESG

81 performance of businesses. Thirdly, our heterogeneity research shows that low digital and poor

82 profitability businesses are most impacted by digital finance. Companies listed on stock exchanges

83 in the West and the Midwest and those outside of low-carbon pilot towns profit the most. Fourth,

84 A dissection of digital financial parameters. While it is clear that increased consumption and

85 digitalization may improve ESG performance, the importance of coverage breadth needs to be

86 clarified. Banks and governments should move quickly to build up digital infrastructure and

87 broaden the range of use cases for digital finance to foster sustainable growth in enterprises.

88 The potential benefits of this research are outlined below:

89 Existing theoretical research seldom includes ESG performance as an outcome variable. This study

90 addresses a knowledge gap by investigating the antecedents of company ESG performance.

91 This research shows that the adoption of digital financial practices improves company

92 sustainability. Embracing an innovative approach that takes the perspective of tiny businesses, it

93 illustrates the environmental and social benefits that may result from embracing digital banking.

94 This theoretically supports further digital economy change. This research contributes two

95 important new ideas: This research explores the impact mechanisms, such as the channels, via

96 which digital money influences environmental, social, and governance performance, yielding

97 insights that may be used to improve future research on the topic. (2) Chinese publicly traded

98 companies are chosen as the research object for this study. Over the course of the last ten years,

99 China has achieved significant advancements in the digital economy, particularly in inclusive

100 finance, which it has actively fostered and supported. The history of digital finance in China may

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101 serve as a helpful case study. Second, China has a responsibility to help achieve global "carbon

102 neutrality" since it is the most significant carbon emitter in the world (H. Chen & Zhao, 2022).

103 Analyzing the ESG performance of Chinese businesses may be helpful in achieving the goal of

104 "carbon reduction" as well as advancing the cause of sustainable development.

105 The study's remaining sections are as follows: The theoretical foundation and research hypotheses

106 are presented and discussed in Section 2. In Section 3, we detail our empirical approach. Section

107 4 discusses the primary empirical findings. The investigation of mechanisms and heterogeneity is

108 covered in Section 5. The findings and policy suggestions are summed up in Section 6.

109 2. Literature review

110 2.1. Corporate ESG and digital finance

111 Several studies (Salampasis & Mention, 2018), (Wang et al., 2022), and (H. Chen & Zhao, 2022),

112 examine digital finance's macroeconomic consequences and social advantages From the viewpoint

113 of the development of the financial sector, several studies have been conducted to investigate the

114 implications that digital finance has had on the banking sector (Feng et al., 2022), financial hazards

115 (Y. Chen et al., 2021) and financial stability (Prokopenko & Miśkiewicz, 2020) and innovation in

116 the financial sector (S. Chen & Zhang, 2021; Cull et al., 2017). Digital finance has generally

117 boosted financial stability and heightened competitiveness across banking companies (Hossain et

118 al., 2020). As the financial industry has adopted more digital technology, new dangers to the

119 sector's stability have emerged. Thus, the regulatory system must be improved (Gatto & Busato,

120 2020).

121 The link between digitally inclusive finance and a variety of economic metrics, such as green total

122 factor productivity, has been investigated by researchers (Zhu & Lee, 2022), green technological

123 innovation (Zhang et al., 2022) and green economic efficiency (B. Lin & Benjamin, 2019). Some
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124 academics have also looked at digital money's social advantages from a resource- and

125 environment-based standpoint. According to the findings of their research on the connection

126 between widespread access to digital financial services and reduced emissions of greenhouse

127 gases, (Liu et al., 2022) find that digital finance's "spatial spillover effect" has the potential to cut

128 emissions in economically disadvantaged regions significantly. To determine how inclusive

129 financial development might help reduce energy poverty, (Hezam et al., 2023) conducted an

130 analysis.

131 Digital finance's macroeconomic effect has been studied from many angles, but its microeconomic

132 impact has yet to be well explored (Bouoiyour et al., 2018). The household consumption structure

133 and resident income have been considered in just a few research. Few studies have examined how

134 digital finance affects the potential to innovate and the economic success of businesses (Leal &

135 Marques, 2021). There is a possibility that financial technology and ESG performance will greatly

136 increase the effectiveness of corporate financing, as (Bhutta et al., 2022) show. Further study is

137 required to determine the effects of digital banking on the sustainability and ecological footprint

138 of businesses.

139 However, few papers have studied the impact variables of ESG. The majority of recent empirical

140 research on the ESG performance of corporations focuses on the financial benefits of ESG

141 investment. ESG investing may be able to perform the following, according to several academic

142 studies:

143 1. Significantly increase business value and operational performance (Michalik et al., 2019).

144 2. Reduce the costs of funding and enhance the effectiveness of business investments (Zhou

145 et al., 2021).

146 3. Encourage corporate innovation and decrease systemic risk.

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147 Once the value of ESG investment has been established, it is time to focus on increasing corporate

148 operational efficiency and bringing about sustainable development by increasing ESG

149 performance. The objective of this study is to investigate these problems by looking at the

150 connection between financial technology and the ESG performance of businesses. An alternative

151 hypothesis is presented to be evaluated before the empirical study.

152 H1: ESG performance of businesses may be greatly enhanced by the use of digital finance.

153 2.2. Impact of digital finance on ESG

154 This research aims to provide insight into the interplay between ESG (environmental, social, and

155 governance) practices and digital finance and to dissect the effect mechanisms. Digital finance,

156 according to (Wang et al., 2022), encourages ESG investment by corporations by easing their

157 financial limitations. One benefit of digital finance is that it may assist in eliminating the

158 information gap between banks and businesses, speeding up the lending process for corporations.

159 However, expanding digital banking also means more excellent funding opportunities for

160 businesses, including fintech companies. Increasing ESG performance requires enterprises to

161 increase ESG inputs, which in turn requires raising cash from stakeholders. Previous researchers

162 have extensively established the mechanistic relevance of finance limitations in ESG performance

163 studies (Bhutta et al., 2022), and (Uyar et al., 2020).

164 This study expands on previous research by presenting two innovative ways in which digital

165 finance might improve environmental, social, and governance performance: green innovation and

166 outside monitoring. By focusing on energy efficiency, environmental safeguards, and waste

167 diversion, green innovations help mitigate environmental issues. To start, the advent of digital

168 banking has drastically reduced the price tag businesses must pay to get funding. According to the

169 research of (Goldstein, 2001), these businesses are the primary foci of green innovation. As a result

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170 of reduced financing expenses, businesses are better able to invest in research, development, and

171 new products. Second, with the rise of digital technology comes an easy-to-use medium for sharing

172 knowledge (Ayerbe et al., 2022). It may lessen the effect of information asymmetry on businesses

173 by decreasing the time and money needed to get information from outside sources. And it may

174 help businesses become more enthusiastic about green innovation. Finally, the development of

175 digital technology allows for technological interchange and collaborative R&D across companies,

176 which helps foster cooperative innovation (Pandey et al., 2022).

177 In contrast, green innovation's primary emphasis on long-term social and environmental well-

178 being makes it a vital component of metrics for assessing the ESG performance of businesses. The

179 two are positively correlated by nature. A company's environmental and social performance may

180 benefit from introducing new goods (or technology) that reduce energy consumption, curb

181 pollution, recycle materials, etc. Therefore, we postulate the following further:

182 H2: Through environmentally friendly innovations, digital finance may boost the ESG

183 performance of corporations.

184 Banks have been able to cut transaction and information expenses because of the widespread

185 adoption of digital technologies. Not only do publicly traded companies rely on readily available

186 data for decision-making, but so do regulators and investors (Sarma & Roy, 2021). Therefore,

187 advancements in digital finance might reduce enterprises' financing costs and boost investors' and

188 creditors' ability to monitor their investments effectively. Accounting firms who perform audits on

189 the financial accounts of public businesses and institutional investors, both of which stand to gain

190 from the acquisition of information, are the supervisors that rely on it the most (Batten et al., 2019).

191 So, it's safe to infer that accounting firms and institutional investors may benefit from the increased

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192 efficiency of digital finance in terms of auditing and decision-making. The focus of auditing firms

193 and institutional investors is defined as "external monitoring" in this analysis.

194 Compared to the general public, however, accounting firms1 and institutional investors prioritize

195 environmental performance and sustainability initiatives more. Environmental disclosures are

196 more likely to be mandated for businesses if external concern grows (for example, if the proportion

197 of institutional investors rises). Then, businesses will pay more attention to environmental and

198 social concerns. Managers at corporations will prioritize ESG enhancements to satisfy outside

199 watchdogs and entice new investors. Therefore, the following conjecture makes sense to put forth.

200 H3: Through facilitating more effective external oversight, digital finance may boost the ESG

201 performance of corporations.

202 Figure 1 concisely summarizes the theoretical examination and study hypotheses presented before.

203 In the part devoted to the empirical analysis, the procedure for verifying the hypothesis will be

204 broken down in more detail.

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205

206 Figure 1. Theoretical structure.

207 Note: Digital finance has the potential to significantly enhance businesses' environmental, social, and governance

208 performance (H1). Corporate ESG performance may be enhanced through green innovation, supporting Hypothesis

209 2. Third Hypothesis: Digital finance will help companies enhance their ESG performance by making external

210 oversight more effective.

211 3. Methodology

212 3.1. Research Model

213 Using panel data collected from Chinese companies registered on the Hong Kong Stock Exchange,

214 this study puts the research hypotheses to the test. A baseline regression is conducted using a fixed-

215 effects model to investigate the link between the inclusion of digital finances and the ESG

216 performance of publicly listed businesses. This is the starting point for the model:

217 ESGit = α1 + α2 DFIICit + αc Xit + μi + δt + εit (1)

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218 ESGit represents the company's environmental, social, and governance performance in year t, and

219 DFIICit represents the maturity of digital finance in the city of incorporation for the company i.

220 The collection of independent variables, denoted by Xit, consists mainly of financial indicators of

221 publicly traded companies. The random error term is denoted by εit, whereas δt and μi represent

222 the time (year) and individual (firm) fixed effects, respectively. The computed regression

223 parameters are α1, α2 and α3, with α2 characterizing the marginal effect of digital finance on the

224 dependent variable.

225 This research uses a baseline regression to examine how digital financial inclusion affects ESG

226 success. In addition, models with moderating effects are tested to learn more about the relationship

227 structure between the primary variables.

228 ESGit = β1 + β2 DFIICit + βm Mit + β3 DFIICit ∗ Mit + βc Xit + μi + δt + εit (2)

229 Mit is the possible moderating variable; all other variables retain their original values. This study

230 explores deeper into the process of digital the financial sector's influence on the ESG performance

231 of businesses. It does so by using Invent as a stand-in for environmentally friendly technological

232 advancement and Big4 and INST as measurements of external monitoring. When β3 is statistically

233 significant, we know there is a moderating impact.

234 All of the aforementioned models characterize digital finances by means of a continuous variable.

235 Endogeneity concerns raise doubts about the validity of the conclusions obtained using these

236 models. Due to the complexity of the relationship between ESG performance of businesses and

237 digital financial inclusion, a robustness evaluation is performed using DID model. With the foreign

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238 policy shock of improved connection in the Digital China Strategy2 trial cities, this piece

239 accurately portrays the growth of digital banking (Ma et al., 2023).

240 In 2013, Following the rollout of the "Broadband China" strategic plan by the State Council of

241 China, 39 cities (clusters) every year from 2014 to 2016 were selected as demonstration cities,

242 with an additional 117 cities added to the list afterward. Therefore, the following conditions are

243 applied to the continuous DID model in this investigation:

244 ESGit = θ1 + θ2 Policyi × Post it + θc Xit + μi + δt + εit (3)

245 Policyi stands for the "Broadband China" policy surprise. The variable is assigned the value one if

246 the city where Company i is based is a demonstration city and the value 0 otherwise. Moreover,

247 Postit is equal to 1 if the city where Company i is situated is in the list of demonstration cities before

248 (or in) year t, and 0 otherwise. The significance of the other factors remains the same.

249 3.2. Selecting Factors

250 3.2.1. Dependence factors

251 Beyond traditional financial metrics, considering ESG performance is crucial when evaluating a

252 company's success. Recent study (Isaac et al., 2021) use evaluations from independent

253 organizations as a proxy for companies' ESG performance. ESG scores (ratings) are calculated

254 mainly by these organizations by building indicator systems, weighting indicators differently, and

255 then summing. Bloomberg and STOXX both employ a variety of environmental performance

256 measures, some of which include the intensity of carbon emissions, the efficiency with which

257 water is used, and the level of soil contamination, among others, to evaluate a company's

258 preparedness to handle environmental risks. In addition, several researchers in China (Otek

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259 Ntsama et al., 2021) use company social responsibility reports as evidence of ESG success. Instead

260 of relying on this indicator, researchers have found more success using the ESG rating data

261 published by Shanghai Huazheng Index Information Service Company (hereafter referred to as the

262 Huazheng Index, accessible through the Wind database). On the basis of four criteria: the overall

263 rating, the environmental performance, the social responsibility performance, and the governance

264 performance performance—all companies trading on the A-share market are assigned one of nine

265 letter grades. Beijing SynTao Green Finance's ESG assessment system consists of a 10-grade ESG

266 grading system ranging from A+ to D and an ESG score system ranging from 0 to 100 (found in

267 the CSMAR database).

268 Due to the nature of the research and the data at hand, we utilize Bloomberg's ESG ratings to

269 measure the ESG effectiveness of publicly traded companies. In addition, the Huazheng Index's

270 ESG rating data is utilized to ensure reliability. Table 1 displays Bloomberg's unique rating system.

271 To ensure that the ESG scores are on the same scale as the other variables, they are normalized by

272 dividing them by 100 before being included in the model.

273 Table 1. The ESG rating developed by Bloomberg.

Stability Subject Measurement

Sustainability Condition of the Air 5.79%
Temperature Rise 5.72%
Consequences on Ecosystems and
5.78%
the environment
Renewable energy 5.75%
Products and Debris 5.76%
Line of Service 5.78%
Liquid 5.78%
Societal Clientele & Locale 6.55%
Variety 6.48%
Morality and Regulation 6.59%
Prevention of Harm and Injury 6.59%
Intangible Assets 6.57%
Line of Service 6.56%
Management Exposure to Audit Oversight 5.19%
Membership of the management
5.18%
team

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 Rewards 5.18%
Variety 5.19%
Freedom 5.19%
Elections & Board Structure Control 5.19%
Ecologically Sound Policymaking 5.19%
Duration 5.19%
274 Note: The business ESG score is the aggregate weighted score for environmental, social, and governance factors.

275 3.2.2. Critical factors

276 To define digital finance, this research uses the "Digital Financial Inclusion Index of China"3

277 developed by Peking University (S. Chen & Zhang, 2021). The index is comprised of three

278 different sub-indicators: The Degree of Digitization, the Depth of Use, and the Breadth of

279 Coverage. Noting that the DFIIC statistics have yet to be refined to the company level, it is

280 essential to note that this research emphasizes listed enterprises. Therefore, we define the

281 company's degree of digital financial development based on data from the city where the company

282 is registered with the DFIIC. In addition, all DFIIC indices are divided by 100 before being

283 included in the model so that all variables are on an equal footing.

284 3.2.3. Modifiable Factors

285 This research begins with the idea that several variables are at play outside the control of individual

286 companies that affect the ESG performance of publicly traded companies.

287 1) Size of the Firm: This indicator, which is the logarithm of total assets, provides insight

288 into the company's size and ability to compete in the market. This should be the first

289 variable added to the control set since it profoundly impacts the company's actions across

290 the board, including its ESG commitment and transparency (Cojoianu et al., 2022).

291 2) Ratio of borrowing: A company's ability to borrow money from outside sources is shown

292 by this ratio, which measures its total liabilities against its total assets. In addition to

293 revealing the firm's ESG performance, this indicator may provide insight into the firm's

294 risk exposure (Zhan & Santos-Paulino, 2021).

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295 3) Asset Turnover Ratio: This metric, calculated as net profit/total assets, provides insight

296 into a company's financial health. If the indicator is high, then it means the company is

297 doing well in terms of ESG performance, which includes things like making more money

298 and spending less.

299 4) The value of Tobin's Q: This metric, calculated as market value divided by replacement

300 cost, is frequently employed as a proxy for a company's success and development.

301 5) Government-Owned Company: Government-Owned companies are businesses that

302 report directly to the government. Government-Owned companies act according to the

303 whims of the government. This means that the government's demands for businesses'

304 sustainability and ethical behavior may be seen in the ESG performance gap between

305 Government-Owned companies (S. Chen et al., 2022). If a company is Government-

306 Owned, then Government-Owned will be 1, and else it will be 0.

307 6) Organization of Shareholders: The equity structure of a company is reflected in the

308 decisions made about the top shareholder's shareholding ratio and the percentage of

309 management ownership. The ESG performance of a company is strongly influenced by the

310 makeup of its decision-makers, which may be gleaned from its ownership structure (Kuc

311 & Teplý, 2022).

312 7) Threat to Assets: For the purpose of illustrating the potential financial risk that businesses

313 face, we will utilize the amount of money that is appropriated by major shareholders. Listed

314 enterprises' ESG performance may be severely impacted by the transfer of money by

315 significant shareholders via the internal capital market, which reduces cash flow (He et al.,

316 2022).

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317 The financial qualities of a company are essential, but the economic climate in which the company

318 operates also impacts the company's ESG performance.

319 1) Economic growth in the region: To check for the study's robustness, the provincial

320 economic performance where the company is situated is used as a control variable. The

321 proxy factor for regional economic progress is derived by adjusting the GDP per capita for

322 2011 inflation and then using a logarithmic transformation to the adjusted value.

323 2) Policy ambiguity in the economy: Since policy ambiguity has been shown to affect

324 business decisions (He et al., 2020; Shi et al., 2020). This study adopts a quantitative

325 methodology by including a metric for the policy uncertainty of the region's financial sector

326 in which the company is located in the model to account for the financial volatility to which

327 the firm is susceptible.

328 3) Structure of Regional Industry: The business environment of an area affects a company's

329 environmental and social performance significantly, together with the rate of economic

330 expansion and the potential for changes in government policy (Do, 2021). A ratio of the

331 value generated by primary industries to that of secondary industries may be used to define

332 the economic makeup of a province.

333 3.2.4. Mechanism-related factors

334 Sustainability and green technology: Scale design, green patent filings, and green patent grants

335 are critical metrics academics use to reveal a company's green innovation capability in the existing

336 literature. Green patent approval may take three to five years and is rife with instability and

337 unpredictability. Since there is no direct measure of green innovation, the number of applications

338 for environmentally friendly patents serves as a stand-in in this study. And because both innovation

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339 and utility patents fall under the umbrella of "patents" in China, this is something to keep in mind.

340 Invention patents, subject to stricter standards for novelty and pre-grant review than utility patents,

341 are thus more indicative of the actual inventive capacity. The authors of this study conclude that

342 the number of requests for environmentally friendly patents is a reasonable proxy for the quantity

343 of green innovation occurring inside corporations.

344 External monitoring: Public expectations and demands for corporations to carry out their social

345 responsibilities rise in tandem with rising societal concern for environmental quality. This kind of

346 scrutiny from the outside world might encourage businesses to put more money into

347 environmental, social, and governance initiatives. Accounting companies are responsible for

348 reviewing listed corporations' financial accounts and ESG disclosure reports, while government

349 legislation is another possible source of external monitoring. International Big Four accounting

350 companies give greater oversight and have a more uniform audit procedure than local accounting

351 firms. For this reason, having one of the "Big 4" audits a publicly traded company, indicates that

352 the company is subject to stricter external scrutiny. Also, compared to regular shareholders,

353 institutional investors care more about how a company is doing regarding environmental, social,

354 and governance metrics. Through the shareholders' meeting, they may use their voting power or

355 gain more board seats to affect the company's ESG investing policies and practices. As a

356 consequence, this section substitutes the percentage of shares owned by institutional investors for

357 actual external oversight.

358 3.3. Sources and data description

359 This research uses a sample of Chinese companies trading on the A-share market from 2011 to

360 2020, and it screens that sample as follows: (i) it eliminates companies trading in the financial and

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361 real estate sectors; (ii) it eliminates companies trading with abnormal statuses like ST, *ST, PT,

362 etc.; and (iii) it eliminates companies with either missing or inappropriate ESG data and the digital

363 finance index. There are 1005 companies in the sample after screening (many were eliminated due

364 to missing ESG data), and 7249 yearly observations of enterprises are set aside. Additionally,

365 winsorizing is performed on every continuous factor in the model at the 1% and 99% levels to

366 reduce the impact of severe outliers on the regression outcomes.

367 This research uses Bloomberg data for the ESG scores and the Wind database for the ESG ratings.

368 Indexes in digital finance trace their origins to China's Peking University. The CSMAR database

369 (China Stock Market & Accounting Research) contains financial information on publicly traded

370 companies. Macroeconomic information is compiled from the China Statistical Yearbook, the

371 National Bureau of Statistics, and the EPS database. The State Intellectual Property Office and the

372 World Intellectual Property Organization provide statistics on green innovations.

373 3.4 Data analysis

374 This part focuses on the first regression findings and confirms their reliability through multiple

375 robustness tests. To ensure that the data are not aberrant and that multicollinearity does not exist,

376 descriptive statistics and correlation analysis are performed before running the baseline

377 regressions. This research includes a robustness check after the first regression has been run by

378 removing big cities and province capitals, adjusting for macroeconomic factors, using a dynamic

379 instrumental variables (DID) model, and changing crucial variables.

18
380 4. Results and Discussion

381 4.1.1. Statistical descriptions

382 Descriptive statistics are included in Table 2 for all variables. Environmental, social, and

383 governance performance variation is reflected in the broad range of possible values for each ESG

384 score. However, the metrics for the growth of the digital financial sector have low averages and

385 high dispersion. There is also some variation in other control factors. All variables are of around

386 the same size, and there are no statistically significant outliers, as shown by the data.

387 Table 2. A descriptive analysis of the most important factors.

Functioning Factors Assessment Signifies Variance Minimal Highest

Reliant Sustainability, Societal,
8248 1.218 1.063 1.122 1.444
factors Management
Sustainability 8248 1.109 1.076 1.025 1.413
Societal 8248 1.249 1.092 1.072 1.565
Management 8248 1.454 1.053 1.338 1.588
Significant Index of China's Economic
8248 3.368 1.889 1.299 5.105
factors Digital Access
Coverage Extent 8248 3.179 1.872 1.187 4.849
Length of use 8248 3.356 1.919 1.383 5.398
Degree of Transformation 8248 4.012 2.099 1.214 5.624
Modifiable Size of the Firm
8248 33.147 2.299 30.472 36.219
Factors
Ratio of borrowing 8248 1.484 2.199 1.077 1.869
Asset Turnover Ratio 8248 1.049 1.058 −1.147 1.208
The value of Tobin's Q 8119 2.816 2.092 1.857 7.969
Government-Owned
8248 1.539 1.498 1.002 2.002
Company
Organization 8248 1.376 1.158 1.092 1.744
Shareholders 7979 1.068 1.147 1.002 1.623
Threat to Assets 7249 1.017 1.023 1.002 1.128
Economic growth in the
8207 21.118 1.456 8.708 22.008
region
Policy ambiguity in the
8207 1.236 1.173 1.003 1.864
economy
Structure of Regional
8207 1.402 1.104 1.162 1.622
Industry
Process
External 8248 1.506 1.223 1.019 1.882
factors
Monitoring 8248 1.126 1.332 1.002 2.002
Sustainability and green
8248 1.339 1.789 1.002 4.972
technology
Petition for ecological
8248 1.256 1.654 1.002 4.298
patents for services

19
 Conflict 7749 1.133 1.128 1.004 2.549
Measurement of internal
8196 7.363 1.968 1.002 7.906
surveillance
388 Note: All statistical variables are assigned respectable values, with no severe outliers.

389 4.1.2. Analyzing correlations

390 The size and statistical significance of the correlation coefficients between the study's primary

391 variables are summarized in Table 3. Most correlation coefficients are substantially less than 0.5,

392 suggesting that there is little to no correlation between the variables and protecting against estimate

393 mistakes caused by multicollinearity. According to the correlation coefficients, ESG is firmly

394 related to the digital funding index, firm size, employ ratio, government-owned businesses, and

395 the first largest shareholder's shareholding and substantially negatively related to Tobin's Q,

396 management possession, and capital appropriation by key shareholders. Additional research on the

397 ESG-digital finance connection is required.

20
398

399 Table 3. Analysis of correlations.

Sustainability Index of Size of the Ratio of Asset Governmen The value Organization Shareholders Threat
, Societal, China's Firm borrowin Turnover t-Owned of Tobin's to
Management Economic g Ratio Company Q Assets
Digital
Access
Sustainability,
Societal, 1
Management
Index of China's
Economic Digital 0.178*** 1
Access
Size of the Firm 0.413*** 0.164*** 1
Ratio of
0.134*** 0.039*** 0.539*** 1
borrowing
Asset Turnover
0.002 0.153*** 0.082*** 0.448*** 1
Ratio
Government-
0.178*** 0.166*** 0.308*** 0.232*** 0.174*** 1
Owned Company
The value of
0.169*** 0.106 0.464*** 0.434*** 0.343*** 1.224*** 1
Tobin's Q
Organization 0.132*** 0.086*** 0.267*** 0.104*** 0.062*** 0.329*** 0.127*** 1
Shareholders 0.125*** 0.028** 0.306*** 0.255*** 0.184*** 0.469*** 0.168*** 0.198*** 1
Threat to Assets 0.034*** 0.056*** 0.135*** 0.229*** 0.132*** 0.054*** 0.073*** 1.074*** 0.104 1
400 Note: Significant values of 1% and 5% are indicated for the correlation coefficient by the *** and ** symbols, respectively.

21
401

402 4.1.3. Initial findings

403 Empirical findings from model (1) are summarized in Table 4, with columns (1)-(4) examining the uncontrolled impact of digital

404 currency adoption on ESG metrics and their top three sub metrics. The outcomes of regressions, including control variables, are shown

405 in columns (5)-(8). Digital finance has the ability to significantly improve firms' ESG performance, as estimated by the DFIIC

406 coefficients. In particular, the growth of digital finance in the location of the business has a considerable positive effect on environmental

407 and social performance. Still, it has little to no effect on corporate governance performance.

408 Table 4. Findings from initialization regressions.

1 2 3 4 5 6 7 8
Sustainability, Sustainability Societal Management Sustainability, Sustainability Societal Management
Societal, Societal,
Management Management
Index of China's
Economic Digital 0.021⁎ ⁎ 0.035⁎ ⁎ 0.044⁎ ⁎ ⁎ 0.205 0.023⁎ ⁎ 0.039⁎ ⁎ ⁎ 0.039⁎ ⁎ 0.105
Access
(2.25) (3.47) (3.77) (−2.15) (3.32) (3.76) (3.57) (−0.45)
Size of the Firm 1.008⁎ ⁎ ⁎ 1.012⁎ ⁎ ⁎ 1.017⁎ ⁎ ⁎ 1.004
(4.58) (4.16) (5.06) (1.98)
Ratio of borrowing −1.016 1.005 −1.036⁎ ⁎ ⁎ −1.029⁎ ⁎ ⁎
(−2.64) (1.28) (−3.88) (−5.13)
Asset Turnover
1.017 1.017 1.028 1.004
Ratio
(2.04) (1.83) (2.08) (1.18)
Government- ⁎⁎
1.008 1.008 1.017 −1.006
Owned Company
(2.55) (2.06) (3.59) (−1.94)

22
 The value of
1.005⁎ ⁎ ⁎ 1.006⁎ ⁎ ⁎ 1.004⁎ −1.003
Tobin's Q
(4.02) (4.82) (2.94) (−2.26)
Organization 1.034⁎ ⁎ ⁎ 1.038⁎ ⁎ 1.024 1.027⁎ ⁎
(3.86) (3.38) (2.42) (3.22)
Shareholders 1.049⁎ ⁎ ⁎ 1.059⁎ ⁎ ⁎ 1.038⁎ ⁎ 1.047⁎ ⁎
(4.69) (5.09) (3.19) (3.38)
Threat to Assets −1.099⁎ ⁎ ⁎ −1.129⁎ ⁎ ⁎ −1.109⁎ −1.063⁎ ⁎
(−3.96) (−3.84) (−2.89) (−3.06)
Regular 1.168⁎ ⁎ ⁎ 11.028 1.148⁎ ⁎ ⁎ 1.456⁎ ⁎ ⁎ −1.066 −1.242⁎ ⁎ ⁎ −2.198⁎ ⁎ 1.418⁎ ⁎ ⁎
(8.57) (1.92) (5.18) (36.69) (−2.05) (−4.12) (−3.24) (9.24)
Company ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Duration ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
R2 0.779 0.724 0.766 0.783 0.786 0.729 0.775 0.789

409 Note: The findings of the regression show that digital finance may greatly boost the ESG performance of corporations, notably in environmental and social

410 responsibility. The significance levels of 1%, 5%, and 10% are indicated by ***, **, and *. The following tables all have the same visual meanings.

23
411 Since sustainability and social responsibility investments are directed outward, they are more

412 vulnerable to fluctuations in the broader market than other types of investments (Ji et al., 2020).

413 To speed up the introduction of financial aid and research-related goods, listed companies may

414 benefit from a more streamlined information exchange platform made possible by advancements

415 in digital infrastructure (Caballero-Morales, 2021). However, DFIIC's effect on governance is

416 negligible since the efficiency with which corporations control themselves and manage their

417 internal affairs lags behind the development of the external environment.

418 Sustainability and social responsibility investments by publicly traded companies also have

419 positive externalities, helping to mitigate future environmental deterioration and increase societal

420 well-being (Vilkaite-Vaitone & Skackauskiene, 2019). As a result, digital finance can potentially

421 boost the sustainable growth of society as a whole, not only in corporate governance performance.

422 According to the computed coefficients of the other control variables, (1) the more significant the

423 business, the better its ESG performance. One possible explanation is that more prominent

424 companies have more resources, are farther along in their growth, and can better look beyond their

425 financial success to include environmental and social responsibility concerns (Tang & Zhang,

426 2020). (2) When a company's overall ESG performance improves, Tobin's Q goes up. Businesses

427 often utilize Tobin's Q to track their progress and productivity. This finding suggests that

428 successful businesses are also socially and environmentally responsible ones. (3) Listed companies

429 with a more significant proportion of ownership by the first major shareholder have better ESG

430 performance because the majority of publicly traded companies' first large owners are either

431 institutional investors or state-owned capital. More attention will be paid to environmental

432 sustainability by state-owned capital and institutional investors than regular shareholders or

24
433 individuals. This is why they are open to corporations adopting more environmentally and socially

434 responsible decisions. M-share also broadly represents the influence of management on the

435 company's top-level decision-making. Being closer to the company's operations, management has

436 a better idea than regular shareholders of how the company may best contribute to society. This

437 means that companies with a more significant proportion of stock tend to have more robust ESG

438 metrics. (4) The poorer the ESG performance of listed enterprises is, the greater the amount of

439 capital occupied by significant owners. This is because every company has finite resources, and if

440 substantial shareholders take significant sums, because of this, resources devoted to sustainability

441 and social justice would ultimately be cut.

442 The following policy considerations emerge from a synthesis of the preceding findings: The

443 growth of digital finance in the macroeconomic environment, together with larger company sizes

444 and more stringent internal monitoring methods, may help boost corporations' environmental,

445 social, and governance (ESG) performance.

446 4.2. Robustness check

447 4.2.1. Financing for macroeconomics

448 Even though macroeconomic conditions are known to affect company ESG performance, these

449 factors are not adjusted for in the baseline regressions (Neofytou et al., 2020). Gross domestic

450 product (GDP) per person is used in this study to measure economic progress and Economic Policy

451 Units (EPU) are used to put a price on policy uncertainty. The INDst indicates the industrial

452 structure as a ratio of tertiary and secondary industries' production. Further empirical findings are

453 given in Table 5 by matching those above three economic variables at the provincial level to all

454 listed enterprises by year and province of registration.

25
455 Table 5. Findings from rigorous testing.

1 2 3 4
Sustainability, Sustainability Societal Management
Societal,
Management
Index of China's
Economic Digital 1.023⁎ ⁎ 1.038⁎ ⁎ ⁎ 1.043⁎ ⁎ 1.006
Access
(3.24) (3.77) (3.56) (1.55)
Economic growth in
−1.008 −1.009 −1.012 −1.013
the region
(−1.56) (−1.59) (−1.68) (−2.52)
Policy ambiguity in
−1.009 −1.008 −1.012⁎ 1.004
the economy
(−2.73) (−2.66) (−2.95) (1.68)
Structure of ⁎
−1.042 −1.006 −1.129 −1.012
Regional Industry
(−1.92) (−1.08) (−2.78) (−1.26)
Regular 1.017 −1.148 −1.059 1.526⁎ ⁎ ⁎
(1.15) (−2.02) (−1.39) (6.95)
Company and ✓ ✓ ✓ ✓
duration
R2 0.787 0.729 0.775 0.789

456

457 Table 6. Replacement and DID regression findings after changing the critical variables.

1 2 3 4 5
Index Sustainability, Sustainability Societal Management
Huazheng Societal,
Management
Index of China's
Economic 1.269
Digital Access
(2.28)
Post and Policy 1.005 1.003 1.008⁎ ⁎ ⁎ 1.005
(2.16) (1.25) (3.75) (2.13)
Regular 1.698 −1.019 −1.163⁎ ⁎ −1.118 1.413⁎ ⁎ ⁎
(1.56) (−1.28) (−3.26) (−2.38) (9.55)
Company and ✓ ✓ ✓ ✓ ✓
duration
R2 0.663 0.786 0.729 0.775 0.789

458

459 Table 7. Statistics without towns and capitals.

1 2 3 4
Sustainability, Sustainability Societal Management
Societal,
Management

26
 Index of China's
Economic Digital 1.029⁎ 1.055⁎ ⁎ 1.009 1.004
Access
(2.69) (3.24) (1.29) (1.19)
Regular −1.059 −1.263⁎ ⁎ −1.106 1.412⁎ ⁎ ⁎
(−1.67) (−3.44) (−1.82) (6.59)
Company and ✓ ✓ ✓ ✓
duration
R2 0.733 0.685 0.736 0.769

460

461 Table 8. IV Approach for Testing Stability.

1 2 3 4
Index of China's Sustainability, Index of China's Sustainability,
Economic Digital Societal, Economic Digital Societal,
Access Management Access Management
Phase First Second Third Fourth
Index of China's
Economic Digital 1.138** 1.098***
Access
L. Index of China's
Economic Digital 1.175***
Access
F. Structure of the
−1.963***
Internet
Regular 3.388*** −1.133 2.398*** 1.209***
Company and ✓ ✓ ✓ ✓
duration
R2 0.799 0.859 0.899 0.852

462 Note: All robustness testing found that the original regression findings could be trusted.

463 Even after accounting for the influence of general economic circumstances, the DFIIC coefficients

464 shown in Table 5 indicate that digital finance may still contribute considerably to the

465 environmental, social, and governance performance of corporations. However, only minor

466 negative correlations exist between ESG performance at corporations and economic fundamentals.

467 4.2.2. Substituting Vital Parameters

468 Using Bloomberg's newly introduced ESG ratings, we can evaluate the ESG performance of

469 companies in the baseline regressions. In addition, Huazheng Index's ESG ratings for publicly

27
470 traded companies are used to perform a regression analysis for this research. The ratings are used

471 as a stand-in for the dependent variables and are coded on a scale from one to nine (C to AAA).

472 Column 1, Table 6 displays the regression results with the essential variables substituted.

473 According to DFIIC's standards, digital finance may benefit corporations' environmental, social,

474 and governance (ESG) performance, although this effect is negligible. The ESG ranking may need

475 to include disparities in ESG performance across organizations in practice since it divides all listed

476 companies into nine categories. On the other hand, the Bloomberg score employed in the baseline

477 regression is an objective rating system that compares businesses based on their relative strengths

478 and weaknesses.

479 4.2.3. Constant DID evaluation

480 Further verification of the causal association between e-commerce and firm ESG performance is

481 conducted using the DID model to account for the possible endogeneity issue. The "Broadband

482 China Strategy" demonstration cities are used as a welcome jolt to the financial sector's digital

483 transformation, according to (Chirumalla, 2021). After that, we analyze the DID model with the

484 association term and the outcomes are shown in columns (2) -(5) of Table 6. Despite having little

485 effect on the environment and governance efficiency of listed enterprises, the "Broadband China

486 Strategy" significantly boost their social performance, as shown by the interaction term coefficient.

487 This further corroborates the findings of the first regressions.

488 4.2.4. Relocating capital towns and governments

489 To avoid bias in the estimate, this research re-runs the regressions by omitting major cities and

490 province capitals, which have more digital finance than other prefecture-level cities. Table 7 shows

28
491 estimated findings. ESG performance may be significantly improved through digital finance.

492 Digital finance boosts environmental performance but not social or governance performance.

493 4.2.5. Analyzing using instrumental factors

494 Endogeneity may have been an issue in the prior empirical research due to missing data or biased

495 samples. For instance, identifying the connection between digital finance and corporate ESG may

496 vary from location to location, depending on resource endowments and development levels. It's

497 challenging to take into account all of these elements. This research uses the instrumental variables

498 technique to remove the endogeneity issue's interference further. Practical and appropriate

499 instrumental variables should adhere to the concepts of homogeneity and relevance. This research

500 follows (Da Costa & Popović, 2020) in using lagging and leading periods of local Internet

501 penetration and digital finance growth as instrumental factors. As an example of the importance,

502 consider that improving Internet infrastructure is inextricably linked to digital finance and that

503 Internet penetration indicates the degree to which cities have embraced digitization. A model may

504 also be estimated without considering the instrumental factors and error terms. And the level of

505 Internet use in the past has no real bearing on companies' ESG performance now. Thus, the need

506 for instrumental variables to be exogenous is met.

507 Table 8, displays the IV method regression findings. According to columns (1) and (3), there is a

508 strong relationship between the growth of digital finance and the instrumental variables L. DFIIC

509 and F. Internet. Results in columns (2) and (4) confirm the validity of the first regression findings

510 by showing that digital finance may significantly enhance ESG performance at the 5% (or even

511 1%) significance level. The F-statistic for testing the hypothesis of "weak instrumental variable

512 identification" is also significantly higher than 10, suggesting that the alternative hypothesis of

29
513 "strong instrumental variable" is more plausible. Null hypothesis rejected at 10% confidence level

514 due to significant p-values of LM statistics in "insufficient instrumental variable identification"

515 check. Because of this, it was appropriate to include instrumental variables in this analysis.

516 The effects of widespread access to digital financial services on ESG outcomes are the subject of

517 this section's mechanism and heterogeneity study. We will examine the system through the lenses

518 of sustainable development and third-party oversight. At the company, business, and regional

519 levels, analysis variability will highlight the effects of various variables on the association between

520 financial technology and corporate ESG performance.

521 Table 9 displays the regression analysis results using the moderating impact model derived from

522 Eq. Table 9 shows that all of the DFIIC*Invent coefficients are positively significant. This suggests

523 that one way in which the incorporation of digital finances influences the ESG performance of

524 businesses is via the development of cutting-edge green technologies. When combined with a

525 company's strong innovation capability, the financing facilities made possible by digital finance

526 may hasten the adoption of green innovations that benefit the environment and fulfill social duty.

527 That's why, by hastening the development of green technologies and the implementation of their

528 benefits, digital finance may aid in the ESG performance of corporations.

529 Table 9. The findings of the analyzed mechanism.

1 2 3 4
Sustainability, Sustainability Societal Management
Societal,
Management
Sustainability and green
1.007⁎ ⁎ ⁎ 1.009⁎ ⁎ ⁎ 1.006⁎ ⁎ 1.004⁎
technology
(4.88) (6.12) (3.23) (2.72)
External monitoring 1.022⁎ ⁎ ⁎ 1.032⁎ ⁎ ⁎ 1.019⁎ ⁎ ⁎ 1.006⁎
(7.27) (7.12) (5.26) (2.72)
Index of China's Economic
1.008 1.015 1.026 −1.009
Digital Access
(1.63) (2.04) (2.62) (−1.92)

30
 Sustainability and green
1.002 −1.002 1.005 −1.003
technology
(1.26) (−1.08) (2.48) (−2.16)
External monitoring 1.013 1.008 1.016 1.008⁎ ⁎
(2.62) (1.98) (2.57) (2.98)
Regular −1.033 −1.188⁎ ⁎ −1.122 1.406⁎ ⁎ ⁎
(−1.55) (−3.59) (−2.45) (9.43)
Regulator ✓ ✓ ✓ ✓
Company ✓ ✓ ✓ ✓
Duration ✓ ✓ ✓ ✓
R2 0.799 0.748 0.779 0.789

530

531 Table 10. Innovate and INST are factors in the process.

1 2 3 4
Sustainability, Sustainability Societal Management
Societal,
Management
China's Green Technology and
Sustainability Index * Green 1.008⁎ ⁎ ⁎ 1.012⁎ ⁎ ⁎ 1.006⁎ ⁎ ⁎ 1.004
economic growth
(5.68) (6.17) (3.78) (2.64)
Index of China's Economic Digital ⁎⁎⁎ ⁎⁎⁎ ⁎⁎⁎
1.029 1.036 1.028 1.019⁎ ⁎ ⁎
Access * External monitoring
(8.19) (7.58) (5.89) (5.64)
The Digital China Economic Access
1.016 1.029⁎ ⁎ 1.032⁎ ⁎ −1.009
Index
(2.55) (3.12) (3.12) (−2.09)
Energy efficiency and renewable
1.002 −1.002 1.005 −1.003
resources
(1.25) (−1.09) (2.52) (−2.15)
External monitoring 1.019⁎ ⁎ ⁎ 1.027⁎ ⁎ ⁎ 1.015 1.008⁎
(4.26) (4.36) (2.52) (2.68)
Regular −1.008 −1.146⁎ ⁎ −1.104 1.412⁎ ⁎ ⁎
(−1.12) (−3.03) (−2.22) (9.59)
Regulator ✓ ✓ ✓ ✓
Company ✓ ✓ ✓ ✓
Duration ✓ ✓ ✓ ✓
R2 0.796 0.742 0.779 0.793

532 Note: Using Invent as a stand-in for green technological development and Big4 and INST as measures of external
533 oversight, this research delves further into the mechanism of digital finance's impact on business ESG performance.

534 Table 9 shows that the Big 4 and INST both have significant moderating effects at the 1% level.

535 Based on the presented evidence, it seems that using digital finance might increase external

536 oversight, hence improving ESG performance. Even more so than auditing companies, the

537 oversight provided by institutional investors is crucial. Listed companies tend to stick with the

31
538 same auditors throughout time, while the amount of their stock owned by institutional investors

539 might fluctuate. This makes the real-world effect of the decisions made by institutional investors

540 on the ESG performance of listed corporations more transparent. As a result, we can confirm that

541 external monitoring is essential to the process by which digital finance influences the ESG

542 performance of corporations.

543 The effect of technologically-facilitated financial inclusion on the ESG performance of different

544 Chinese enterprises may vary widely 9Table 10)., a nation of enormous size with substantial

545 regional disparities in both natural geographic factors and economic development levels. To better

546 support sustainable corporate growth, this research uses heterogeneity analysis to examine the

547 causation between corporate ESG accomplishment and digital financial inclusion (Table 11).

548 Table 11. The findings of the variance test.

Categor Substantially Limited Growth Developing Substantially Limited -

y digitalized Digitization - Ratio of Ratio of
flipping flipping
assets assets
1 2 3 4 5 6
Sustainability Sustainabilit Sustainabilit Sustainabilit Sustainabilit Sustainabilit
, Societal, y, Societal, y, Societal, y, Societal, y, Societal, y, Societal,
Management Management Management Management Management Management
Index of
China's
Economi 1.009 1.039⁎ ⁎ ⁎ 1.022⁎ ⁎ 1.068⁎ 1.006 1.028⁎ ⁎
c Digital
Access
(1.59) (3.93) (3.09) (2.96) (1.28) (3.23)
Regular −1.088 −1.075 −1.089 −1.048 −1.165 1.003
(−2.12) (−1.83) (−2.37) (−1.24) (−2.58) (1.03)
Regulato ✓ ✓ ✓ ✓ ✓ ✓
r
Company ✓ ✓ ✓ ✓ ✓ ✓
Duration ✓ ✓ ✓ ✓ ✓ ✓
R2 0.859 0.775 0.797 0.854 0.797 0.825

549

32
550 Table 12. Regional variety and variation within companies.

Categoriz Supervisi Compete Moderat Minimal Western Eastern Non- Aviation

ation on ncy e Carbon Carbon & Aviation
Central
1 2 3 4 5 6 7 8
Sustaina Sustaina Sustaina Sustaina Sustaina Sustaina Sustaina Sustaina
bility, bility, bility, bility, bility, bility, bility, bility,
Societal, Societal, Societal, Societal, Societal, Societal, Societal, Societal,
Manage Manage Manage Manage Manage Manage Manage Manage
ment ment ment ment ment ment ment ment
Index of
China's
Economic 1.046⁎ ⁎ ⁎ 1.014 1.028⁎ 1.018 1.038⁎ 1.014 1.058⁎ ⁎ 1.008
Digital
Access
(3.88) (1.98) (2.95) (2.62) (2.84) (1.99) (2.12) (1.77)
−1.228⁎ ⁎
Regular −1.003 ⁎ −1.123 −1.09 −1.128 −1.007 −1.089 1.039
(−1.03) (−3.89) (−2.18) (−1.67) (−2.15) (−1.08) (−1.65) (1.48)
Regulator ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Company ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Duration ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
R2 0.822 0.764 0.782 0.788 0.728 0.806 0.709 0.818

551 Note: Except for the established and growing enterprises, all other groups show substantial disparities.

552 At first, the competitiveness of an industry may have an effect on external transaction costs that

553 are faced by upstream as well as downstream enterprises (Javorcik & Spatareanu, 2011), which in

554 turn can impact the ESG performance of those firms. Accordingly, digital finance affects

555 businesses' ESG outcomes, which may vary greatly depending on the level of competition present

556 in the market. Based on the above analyses, this study divides the listed firms into regulated and

557 competitive categories. Table 12 displays the results of this subgroup regression as lines (1) and

558 (2). Results reveal that digital financial inclusion has a significant positive effect on ESG

559 performance for regulated businesses but has little to no effect on the performance of businesses

560 operating in less regulated marketplaces. Digital finance may affect regulated firms more since

561 they have to provide data on their ESG performance.

562 And in highly polluting businesses, the public has a more considerable expectation for ESG

563 transparency. There will be a heightened focus from both investors and regulators on the ESG

33
564 results of these companies. As a result, the enterprises in this research are separated into two

565 categories, high-emission and low-emission, depending on the intensity of their carbon emissions,

566 and regression analysis is conducted separately for each group. The results show that digital

567 finance improves high-emission enterprises' ESG performance. Companies with significant carbon

568 emissions, like regulated companies, are subject to stricter environmental rules and environmental

569 disclosure obligations, and as a result, they place a greater emphasis on ESG investments. When

570 the external environment (such as financial digitalization) improves, the favorable effect on firms

571 from this shift is amplified. For this reason, low-emission businesses do not feel a significant

572 influence from the rise of digital money.

573 5. Conclusion and Policy implications

574 5.1 Conclusion

575 Over the course of the last several years, concerns such as the effects of global warming and the

576 degradation of nature have not only contributed to an increased realization of a crisis in society as

577 a whole, but they have also presented huge threats to the activities of enterprises (Li & Li, 2020).

578 Environmental consciousness is progressively becoming the center of public attention, and

579 environmental awareness is gradually becoming a determining factor in investment choices

580 (Sharma et al., 2021). As a result of China's market environment, greater emphasis is being placed

581 on businesses' ESG performance. Companies are under pressure from regulatory and policy bodies

582 to enhance their ESG performance (Agoraki et al., 2023). For instance, as a result of the revisions

583 made to the Environmental Protection Act in 2015, enterprises are now subject to higher

584 environmental levies and taxes. Second, commercial banks and other sources of capital are

585 increasing the pressure on businesses to act responsibly when investing and financing in the

586 environment (T. Lin et al., 2022). Companies in China that are responsible for a significant amount

34
587 of emissions and pollution are subject to stricter regulations after the country's most important

588 commercial and financial institutions established a green financial system and put in place a

589 framework for restricted access. Third, there is a growing trend among Chinese investors to

590 demand stricter requirements for disclosing ESG information. Industry and academics are

591 beginning to share a shared concern on how to steer the market toward more investment in

592 environmentally friendly industries and how to actively persuade businesses to improve their

593 capacity for sustainable growth.

594 5.2 Policy Implications

595 This study investigates if and how digital finance has an effect on the ESG performance of

596 organizations using panel data of Chinese A-share listed companies from 2011 to 2020. The four

597 most important findings that emerged from our investigation are listed below:

598 1) Our preliminary research indicates that increasing the use of digital finance has the

599 potential to dramatically enhance the ESG performance of businesses., in particular their

600 performance regarding their ethical and social responsibilities.

601 2) The examination of the mechanisms suggests that the accessibility of financial technology

602 has an effect on ESG performance by enhancing the capacity for environmentally friendly

603 innovation and drawing the interest of external monitors.

604 3) According to the results of the heterogeneity study, the impact of digital economics on ESG

605 performance is most pronounced for organizations that have a low degree of both

606 digitization and revenue, as well as for organizations that operate in industries with

607 substantial levels of emissions of carbon dioxide.

35
608 4) Businesses located in the western and central regions, as well as pilot cities that do not

609 focus on reducing carbon emissions, stand to profit the most from the implementation of

610 digital financial inclusion. After fixing the endogeneity issues and doing multiple tests to

611 evaluate the robustness of our results, we found that they remained unaffected.

612 Based on these results, we may draw the following policy recommendations: (1) Companies

613 should take advantage of the growth of digital finance by putting in place a transparent system for

614 disclosing their ESG data. For them to be able to make educated choices about financial

615 investments, it is necessary for them to be aware of the interdependencies that exist among

616 environmental, social, and governance aspects. (2) The regulatory framework may be modified to

617 include ESG performance and an acceptable system of required ESG information sharing. To

618 promote sustainable development, it should serve as a roadmap for businesses to adopt

619 environmentally responsible investing and finance practices. Nevertheless, the development of

620 digital infrastructure and the further implementation of digital finance are issues that need the

621 attention of authorities and financial institutions in economically undeveloped countries. The

622 government should embrace the complementary nature of green financing and inclusive finance.

623 Thirdly, while making investments, people should consider a company's ESG performance as

624 much as possible. Investment risks may be mitigated by monitoring a company's environmental

625 performance since severe weather events can be catastrophic for businesses. Investing in a

626 company committed to long-term viability is a safe bet for financial success.

627 5.2 Limitations and Future Research Directions

628 This study uses the existing theoretical framework and the data that is readily available to conduct

629 an in-depth investigation of the link between the use of financial technology and the ESG

630 performance of corporations. The conclusions of this research are restricted, however, because of

36
631 the infancy of sustainability disclosure and the fact that many listed firms do not make ESG data

632 available to the public. In addition to this, we analyze how the development of digital money

633 affects the ESG performance of firms. Digital finance has the potential to affect ESG performance

634 in a variety of additional ways. The finance expenses, required disclosure of environmental data

635 systems, and government regulation of the environment may all be examined in future research.

636 In conclusion, despite the fact that this study places an emphasis on the financial and efficiency

637 benefits associated with digital economics, though it has been shown that digital banking has a

638 beneficial impact on ESG performance, further research is needed to fully understand this

639 phenomenon. All of the concerns mentioned above need further investigation in potential research.

640
641 Ethical Approval and Consent to Participate: The authors declared that they have no
642 known competing financial interests or personal relationships, which seem to affect the
643 work reported in this article. We declare that we have no human participants, human data
644 or human issues.
645
646 Consent for Publication: We do not have any individual person’s data in any form.
647
648 Author Contribution: Conceptualization, Methodology: Jiehua Zhong; Writing - original
649 draft: Minghan Wang; Data curation, Data analysis, Interpretation: Xuanyi Liu; Revisions,
650 editing, discussion: Xuanzhi Yang.
651
652 Competing interest statement: The authors declare no conflict of interest.
653
654 Availability of data and materials: The data that support the findings of this study are
655 openly available on request.
656
657 Funding: Nill
658

659

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