Environmental Performance and Corporate Innovation: Evidence From Korea's Rapid ESG Institutionalization

ABSTRACT

Environmental performance has become strategically critical as regulators mandate disclosure, investors screen for ESG commitments, and consumers reward sustainable practices. Yet whether environmental performance enhances or constrains corporate innovation capacity remains contested. This study investigates this relationship using panel data from Korean listed firms during rapid ESG institutionalization. We employ two‐way fixed‐effects regression analysis to test whether environmental performance predicts R&D investment and knowledge capital accumulation. Results demonstrate robust positive associations between environmental performance and innovation. The association strengthens following institutional reforms, concentrating on knowledge‐intensive sectors (manufacturing, finance) rather than operational sectors (retail, wholesale), and depends critically on resource availability. Large firms and export‐oriented firms benefit substantially, while small and domestically focused firms show minimal effects. These findings suggest environmental commitment functions as a strategic capability rather than a compliance cost, provided supporting institutional infrastructure and organizational resources exist. For policymakers, strengthening institutional support mechanisms amplifies environmental‐innovation complementarity, particularly for resource‐constrained firms.