Does better environmental, social, and governance induce better corporate green innovation: The mediating role of financing constraints

Green innovation is a key way for firms to establish competitive advantage and contribute to sustainable development, but it often suffers from financing constraints. In this regard, environmental, social, and governance (ESG) practices allow firms to have a wider investor base, face lower risk, and generate positive market reactions, ultimately leading to a lower cost of capital, which may potentially alleviate financing constraints and provide strong motivation for green innovation. Combining stakeholder theory with the resource‐based view (RBV), this study investigated how ESG substantially affects corporate green innovation. Based on a zero‐inflated Poisson regression analysis of 1577 listed Chinese manufacturing firms, we found that better ESG could significantly induce better corporate green innovation, and financing constraints acted as a mediator in the relationship between ESG and green innovation. Our findings contribute to a more detailed understanding of the mechanisms by which corporate pro‐social decision‐makings initiate and boost green innovation.