Can environmental protection tax law restrain ESG rating divergence?

Purpose This study aims to analyze whether China’s environmental protection tax law (EPTL) mitigates environmental, social and governance (ESG) rating divergence and identify the specific mechanisms involved. It also examines whether the impact on ESG rating divergence varies across different scenarios. Design/methodology/approach A difference-in-differences model is constructed to investigate the impact of the EPTL on ESG rating divergence among heavily polluting enterprises, using data from Chinese A-share listed companies on the Shanghai and Shenzhen stock exchanges from 2015 to 2023. Findings The results indicate that the EPTL significantly reduces ESG rating divergence. Mechanism analysis reveals that the EPTL enhances green innovation, media attention and information disclosure quality in these enterprises, thereby mitigating ESG rating divergence. Heterogeneity analysis indicates that the suppressive effect is more pronounced in resource-based cities, key environmental protection cities and high-carbon-intensity enterprises. Practical implications This study reveals how the EPTL internalizes environmental costs for businesses, incentivizes them to disclose high-quality ESG information and adopts green technologies, thereby reducing ESG rating divergence and promoting a balance between current economic growth and future resource availability. This research offers China’s experience for global sustainable development, demonstrating how policy tools can achieve the fair distribution of environmental responsibilities and ensure that ecological carrying capacity is not undermined by short-term interests. Social implications This study examines the key role of the EPTL in promoting sustainable development. Through economic incentives and constraints, the policy encourages businesses to shift to green production models, mitigate ecological degradation and ensure the long-term availability of resources and ecosystem services. Furthermore, the study calls for stronger regulation of ESG rating discrepancies, ensuring that businesses, while taking on the responsibility for sustainable development, consider the long-term interests of society as a whole and intergenerational equity, thus advancing the coordinated sustainability of the economy, society and environment. Originality/value As shown in the literature, EPTL has been found to enhance firms’ ESG performance. However, to the best of the authors’ knowledge, limited research has examined the impact of EPTL on ESG rating divergence. This study examines the relationship between EPTL implementation and ESG rating divergence, thereby enhancing the understanding of both firms and society concerning EPTL, ESG practices and sustainable development.