Do Transparent Firms Generate Greener Ideas? ESG and Green Patents in China

ABSTRACT

Using Patent Application Data from the State Intellectual Property Office of China, we examine the relationship between ESG information disclosure and firms' environmental innovation, using more than 3500 listed firms. Methodologically, we develop a micro‐founded structural model, which maps directly to relevant empirical regressions. The model supports the validity of our identification and design. We find that firms which disclose ESG information average a 15.8% increase in green patent applications and a 21.4% increase in green patent authorizations as compared to non‐disclosers. The effects are stronger for state‐owned enterprises and for larger, more leveraged, and overinvesting firms. The effects are more pronounced when external monitoring is stronger, with higher analyst attention, and in sectors with historically lower pollution, consistent with capital‐market disciplinary pressures and industry norms. In conclusion, the evidence strongly suggests that ESG disclosure is a substantial driver of corporate environmental innovation, which has relevant implications for regulators and financial decision‐makers.