Can the greening of the tax system improve enterprises' ESG performance? Evidence from China

Can the greening of the tax system truly drive high-quality development of enterprises? ESG, as an investment concept and evaluation criterion focusing on corporate sustainable development, is an essential tool for enterprises to practice high-quality economic development. Based on this, using China's environmental protection tax reform in 2018 as a natural experiment, this paper examines the impact and transmission paths of environmental protection tax on enterprises' ESG performance from the unique dual perspectives of external attention and internal decision-making, adopting a diference-in-differences (DID) approach. The study finds that, firstly, environmental protection tax significantly improves enterprises' ESG levels through the internal level of green innovation and external public environmental concerns. Moreover, the level of internal governance and external analyst attention play a positive moderating role in this process. Secondly, the improvement effect of environmental protection tax on enterprises' ESG performance is more significant for manufacturing enterprises, non-state-owned enterprises, financially resource-rich enterprises, and enterprises located in regions with higher economic growth, lower government-market linkage, and better legal environment. This research responds to the fundamental question of whether the greening of the tax system can truly promote high-quality development of enterprises, and provides valuable insight into how to further enhance the promoting role of environmental protection tax on enterprises' ESG performance.