Unlocking Innovation Through <scp>ESG</scp> : How Development Stages Shape the Impact

ABSTRACT As global attention on sustainable development grows, Environmental, Social, and Governance (ESG) performance has become a critical factor influencing corporate strategies. This study investigates the dynamic impact of ESG on corporate innovation, focusing on patent development as a key measure. By analysing data from publicly listed firms in China (2009–2022), the findings reveal that strong ESG performance significantly enhances innovation output, especially in high‐tech and sustainability‐driven industries. However, the impact of ESG varies across different stages of a firm's innovation lifecycle. A stronger effect is observed after firms achieve key innovation milestones, such as obtaining high‐tech enterprise certification or reaching peak patent output. Before these milestones, the relationship between ESG and innovation is less pronounced, as firms in early stages may prioritise R&amp;D and immediate financial goals over ESG initiatives. ESG practices drive innovation by alleviating financial constraints, enhancing operational efficiency, and optimising resource allocation. These effects are most pronounced during periods of otherwise low innovation activity, thereby fostering long‐term growth. Furthermore, ESG's impact is stronger in larger, privately owned firms and in high‐tech industries. This study contributes to the literature by providing a stage‐dependent understanding of ESG's influence on innovation, offering valuable insights for policymakers and corporate managers on the strategic integration of ESG to drive sustainable growth.