The impact of ESG advantages on the economic development of neighboring regions

As the market undergoes a critical phase where green transformation and financial performance advance in tandem, it is essential to evaluate whether firms can drive societal progress while maximizing profits. However, existing research predominantly examines the effects of ESG (Environmental, Social, and Governance) on firm-level performance or broader macroeconomic outcomes, while the micro-level economic spillover effects of ESG remain largely overlooked. This study utilizes a newly developed microeconomic growth indicator derived from Nighttime Light data to evaluate the positive impact of ESG advantages on the economic development of neighboring regions among A-share listed companies in China's stock market from 2012 to 2021, while also exploring the underlying mechanisms driving this effect. The results show the following: (1) ESG advantages significantly promote economic development in the neighboring region and effectively mitigate the issue of endogeneity through instrumental variable methods. (2) Even after addressing issues related to firm location choices, greenwashing behavior, adjustments to nightlight grids, substitution of core explanatory variables, and ruling out a range of competing hypotheses through robustness checks, the conclusions remain valid. (3) The mechanistic analysis seems to reveal that ESG-advantaged firms mainly promote green innovation, increase labor income, and form the agglomeration of firms, which in turn boosts the economic development of the neighboring region. (4) Heterogeneity analysis further elucidates that, compared to non-ESG companies, ESG companies exert a significantly stronger positive influence on the economic growth of neighboring regions. All three dimensions of ESG positively impact the economic development of neighboring areas. The economic effects of ESG advantages exhibit a diminishing trend with increasing distance. In addition, the improvement of ESG in polluting industries and manufacturing enterprises is more effective. (5) Meanwhile, the generalized random forest model is used to further find that there is a nonlinear situation of heterogeneous effects of ESG advantages. The results of this paper would provide an important reference for Chinese enterprises to boom in neighboring regions while pursuing the goals of “dual carbon” and sustainable development. • ESG advantages boost economic growth in neighboring regions. • We use ESG funds related variables as instrumental variables. • Green innovation, labor income, and agglomeration of firm are key mechanisms. • ESG effects diminish with distance, strongest in polluting and manufacturing sectors. • Generalized random forest reveals nonlinear heterogeneous ESG impacts.