The Positive Impact of ESG Ratings on Corporate Innovation: A Theoretical Framework

In SSCI financial papers on the impact of ESG on corporate innovation, there are several theoretical reasons why ESG ratings may have a positive effect on a company's innovation activities. Firstly, a high ESG rating indicates good corporate governance, which can promote innovation activities (O'Connor and Rafferty, 2012). Secondly, a company's innovation activities may reduce short-term profits, and shareholders may attribute poor performance to managers' lack of effort as they cannot promptly obtain information on innovation performance (Jiang & Yuan, 2018), which may result in their forced resignation. Conducting an ESG rating during the formation process can help shareholders fully understand the company's sustained development performance, enhance trust in management's innovative decisions, reduce the likelihood of forced resignations, and indirectly encourage management to engage in innovation activities (Bereskin and Hsu, 2011; Bereskin and Hsu, 2014; Yuan et al., 2023). Finally, good ESG performance can reduce the financing constraints of listed companies (Bai et al., 2022), which can promote innovation activities (Hall, 2002; Hall and Lerner, 2009; Howell, 2016).