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| Carbon Emissions Trading Regulation and ESG Performance: Evidence from Carbon Emissions Trading Pilots in China |
| WEN Huiyu, DU Jiayue, GAO Haoyu, LI xinming
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School of Management, Guangdong University of Technology;
School of Management and Economics, The Chinese University of Hong Kong, Shenzhen;
School of Finance, Renmin University of China;
School of Finance, Nankai University |
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Abstract Establishing a system for the paid use of natural resources and market-driven mechanisms for energy conservation and carbon reduction is a critical institutional safeguard for achieving the goals of carbon peaking and carbon neutrality. Cultivating the sustainable development capabilities of the economy is inseparable from the effective combination of a well-functioning market and a capable government. Carbon emissions trading scheme with government guidance serves as a core policy instrument for fostering the coordinated balance between the economic growth and sustainable development. The ESG initiatives require firms to address the externalities of their production activities while pursuing profit maximization. ESG performance is a comprehensive indicator of a firm's sustainable development capabilities. This paper examines whether and how the carbon emission trading schemes could motivate firms to actively participate in ESG engagement and cultivate sustainable development capabilities.
Based on China's carbon emissions trading pilot programs gradually initiated since 2013, we adopt the propensity score matching (PSM) and the staggered difference-in-difference (DID) method to estimate the impact of implementing carbon emissions trading scheme on corporate ESG performance, using the data set of listed firms in China's carbon trading pilot regions from 2009 to 2020. We find that after the implementation of the carbon emissions trading scheme, regulated firms experienced a significant improvement of ESG scores relative to non-regulated firms, accounting for an approximately 15.96% standard deviation in ESG scores. This finding indicates that the market-based incentives provided by the carbon trading scheme significantly enhance the ESG engagement of regulated firms. Mechanism analyses indicate that carbon emissions trading scheme strengthens the economic value of low-carbon production, promotes corporate green innovation practices, and improves external information supervision of corporate environmental performance, thereby incentivizing firms to enhance their sustainable development capabilities actively. Heterogeneous analyses find that the role of carbon emissions trading scheme on corporate ESG performance is more pronounced in regions with higher carbon market effectiveness and stronger environmental regulation intensity of local governments, suggesting a synergy between an efficient market and a well-functioning government. Further analyses show that the carbon emissions trading scheme facilitates the synergy between reduction in carbon emissions and increases in low carbon development efficiency, and thus guides sustainable development. Our main results remain robust under alternative variable definitions, different propensity score matching methods, the inclusion of higher-order fixed effects, and placebo tests.
This paper contributes to several strands of literature. First, our study highlights the interaction between corporate behavior and environmental policies from the novel perspective of ESG performance. We reveal the unique role of carbon emission trading scheme in mitigating the negative externalities of economic activities at lower costs, enhancing the understanding of how market-based environmental regulations contribute to effective environmental governance by coordinating economic performance and sustainable development. Second, in the context of the widespread application of ESG investment principles and the recognition of value relevance of ESG, we extend the literature of the driving factors of corporate ESG practices from the perspective of institutional design. We broaden the understanding of how to incentivize enterprises to pursue sustainable development.
This study provides critical policy implications in guiding corporate sustainable development practices through market-based environmental mechanisms. First, to create a sustainability-oriented economic structure that balances economic growth with environmental protection, an efficient market and a proactive government intervention should work together to boost market dynamism and ensure the effective allocation of the carbon factor. Second, participants in capital markets should fully recognize the significant role of sustainable development in their investment evaluations and allocate capital towards industries and enterprises with high potential for emission reduction, leveraging the important functions of the capital market in serving the real economy and facilitating the transition toward sustainable economic development. Third, firms should strengthen carbon risk management and seize opportunities for green transformation. By enhancing environmental performance, firms could drive comprehensive improvements in social and governance performance, strive for the synergistic development of financial performance and ESG outcomes while building long-term sustainability.
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Received: 30 September 2022
Published: 01 November 2024
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