The differentiated effect of China's new environmental protection law on corporate ESG performance

Environmental regulation is a crucial policy tool for governments to curb environmental pollution and manage environmental issues. It also significantly influences corporate Environmental, Social, and Governance(ESG) performance. This study, drawing on research data from Chinese A-share listed companies over the period 2011–2021, employs a difference-in-differences(DID) approach to thoroughly examine the differentiated impacts of China's "strictest ever" New Environmental Protection Law (NEPL) on corporate ESG performance, as well as the underlying mechanisms of these impacts. The results show that the NEPL has notably enhanced the overall ESG performance of heavy polluting enterprises, and the conclusion remains valid even after a series of robustness tests, including identification assumption tests and Double/Debiased Machine Learning(DML) method. The ESG improvement effect of the NEPL exhibits heterogeneity in internal characteristics (such as digital transformation and R&D investment) and external attention (including analyst attention and institutional investor holdings). Further mechanism analysis reveals that the improvement in ESG performance of heavy polluting enterprises, attributed to the NEPL, is primarily driven by enhanced environmental protection (E) resulting from an increase in executive green cognition. However, the NEPL also triggers strategic green innovations and financing constraints, which paradoxically have adverse effects on the fulfillment of corporate social responsibility(S) and the enhancement of corporate governance (G). This paper offers empirical evidence at the micro-level to understand how environmental regulations affect corporate sustainability.