Unveiling the Strategic Role of Environmental Justice: Driving ESG Performance Through Innovation and Digitalization

ABSTRACT The sustainable business practices have received significant attention in recent times. While literature in the domain is growing steadily on various factors, there is little insight into the strategic effect of the environmental justice system on corporate Environmental, Social, and Governance (ESG) Performance. Nonetheless, the environmental justice system, such as environmental courts, can entail coercive measures that could shape corporate ESG performance. Using insights from institutional and stakeholder theories, we run a quasi‐natural experiment on Chinese environmental courts to test how environmental justice affects ESG performance and what the intervening mechanisms are in this nexus. The panel data was collected from 3698 Chinese manufacturing firms and analyzed using difference‐in‐differences analysis. The findings show that environmental justice positively impacts ESG performance through green innovation and digital transformation. Interestingly, the impact was found to be stronger for non‐heavy polluters, larger firms, state‐owned enterprises, and business‐friendly regions. Combining institutional and stakeholder perspectives, we introduce a unique theoretical insight on how environmental justice acts as both an institutional mechanism and stakeholder amplifier. By integrating environmental justice with business strategy, we expand ESG literature and offer several useful implications for practitioners and policymakers, as well as support United Nations Sustainable Development Goals 9, 12, and 16.