The power and paradox of ESG: unlocking new quality productivity for sustainable innovation

Purpose This study examines how new quality productivity (NQP) influences environmental innovation (EI) among China’s A-share listed firms, with a specific focus on the moderating role of environmental, social and governance (ESG) ratings. It explores how internal productivity improvements interact with external governance signals to shape firms’ sustainability outcomes in emerging markets. Design/methodology/approach Based on panel data from 2014 to 2023, NQP is measured using an entropy-weighted method that captures multidimensional performance improvements. ESG ratings are drawn from both domestic and international indices to reflect distinct evaluative standards. Two-stage least squares estimation is employed to address endogeneity, complemented by heterogeneity analysis across ownership types and pollution intensity levels. Findings The results confirm that NQP significantly drives EI, consistent with the resource-based view that internal capabilities underpin sustainable innovation. However, ESG ratings exhibit a dual moderating role: they enhance the NQP–EI link when strategically aligned with firm operations but weaken it under compliance-driven or symbolic ESG adoption. This paradox is particularly evident in non-state-owned firms and those operating in environmentally sensitive sectors. Originality/value This study contributes to performance management and sustainability literature by positioning ESG not only as a governance tool but also as a signal that can either unlock or restrain productivity-led green innovation. It highlights the need for integrated policy frameworks and managerial strategies that align ESG compliance with innovation performance, ensuring that sustainability efforts translate into tangible competitive advantages.