Digital transformation as an ESG performance catalyst with insights from China’s external governance

Digital information networks have deeply integrated into various aspects of global economic development, and empowering enterprises through digitalization in terms of environment, society, and governance is key to achieving sustainable development. Using textual analysis and a sample of A-share listed companies in China from 2009 to 2022, we examine the impact and external mechanisms of digital transformation on companies' ESG performance. The study demonstrates that digital transformation significantly enhances ESG performance. The ESG incentive effect of digital transformation is particularly pronounced in firms that disclose environmental information, in heavily polluting industries, and in regions with lower level of market distortions. Given the three distinct differences among companies, industries, and regions, factors such as investor attention, government environmental regulations, and the optimization of the business environment create favorable external conditions that further strengthen the incentive effect of digital transformation on ESG performance. In conclusion, digital transformation cannot rely solely on the self-directed efforts of enterprises; rather, it requires the influence and direction of suitable external governance to effectively advance the sustainable development.