Can Green Innovation Affect ESG Ratings and Financial Performance? Evidence from Chinese GEM Listed Companies

Socially and environmentally responsible investing is becoming the benchmark in financial markets. Promoting emerging industries' environmental performance, social responsibility, and corporate governance (ESG) ratings are increasingly becoming the consensus of multinational green financial institutions, investors, and governments. This study employs 3100 panel data from 2014 to 2019 to conduct empirical research on green innovation, ESG indicators, and the financial performance of China's Growth Enterprise Market (GEM) listed companies. Based on the "causal steps approach", we adopt the Sobel-goodman and Bootstrap test to explore the partial mediation effect of ESG indicators. Moreover, when testing the interactive effect of endogeneity, instrumental variables combined with two-stage least squares (2SLS) and a general method of moments (GMM) system are applied in the dynamic panel for robustness. Combing with the approach of ESG factors-integrated and ESG factors-embedded regression models, we find that: (1) Green innovation can significantly improve the ESG scores of GEM listed companies. (2) Both green innovation and ESG performance can improve the financial performances of GEM listed companies, and ESG performance plays an indirect mediating role in the promotion of green innovation on financial performance. (3) Both political connection strength and regional innovation capabilities can negatively moderate the promotion of green innovation on financial performance, and moderating the effect of corporate political connections is more significant than the regional innovation. This study expands the research on the effectiveness of ESG indices and green innovation from the view of micro-GEM companies, providing policy enlightenment for the sustainable development of emerging industries. Our findings provide noteworthy implications for regulators, academicians and practitioners interested in exploring green innovation, ESG rating and financial performance. In addition, providing regulators and the board of directors with insights into the company's and country's future growth prospects.