The Digital Pathway to Sustainability: How Green Innovation Translates Digital Transformation Into ESG Performance

This study aims to resolve theoretical ambiguities concerning the impact of digital transformation (DT) on Environmental, Social, and Governance (ESG) performance within the unique institutional context of an emerging economy. It specifically investigates the mediating role of green innovation as a key mechanism in the DT-ESG nexus in Vietnam. The study utilizes a balanced panel dataset of 400 enterprises listed on Vietnamese stock exchanges from 2019 to 2024. We construct novel composite indices for both digital transformation and green innovation using Principal Component Analysis (PCA) on data from corporate annual reports. To address endogeneity and dynamic panel bias, the analysis employs a System Generalized Method of Moments (SGMM) estimator, with the mediation pathway tested via a cluster-bootstrap analysis. The findings reveal that digital transformation has a positive and statistically significant impact on corporate ESG performance. Green innovation is confirmed as a crucial mediating mechanism, translating digital capabilities into enhanced sustainability outcomes. This effect is heterogeneous across industries, with the technology and energy sectors showing the most pronounced positive impacts. Firm size and supportive national policies are also found to amplify these effects. This study contributes to the literature by providing one of the first empirical examinations of the DT-ESG relationship in Vietnam. It offers a synthesized theoretical framework and develops context-appropriate, non-patent-based measures for digital transformation and green innovation. The findings provide actionable insights for managers and policymakers in emerging markets on leveraging digital transformation as a strategic driver for sustainable development.