Do tax incentives matter in promoting corporate ESG performance toward sustainable development?

Abstract Environmental, Social, and Governance (ESG) reflects the new concept of global sustainable development. This paper, integrating institutional theory, stakeholder theory, and the resource‐based view (RBV), aims to explain how tax incentives enhance corporate ESG performance. Using listed companies in China as the research sample, this paper employs a two‐way fixed effects model to empirically test the causal relationship between the variables. The empirical results show that tax incentives significantly promote overall corporate ESG performance as well as its individual dimensions. Mechanism analysis reveals that tax incentives enhance ESG performance by improving corporate technological innovation capabilities. Heterogeneity analyses indicate that the positive impact of tax incentives on ESG performance is more pronounced when firms are state‐owned, from nonpolluting industries, and located in the eastern region. Our findings contribute valuable insights to scholars and industry experts researching the impact of fiscal policies on corporate ESG performance.