Does Water Pollution Truly Erode Corporate ESG Performance? Evidence from China

Water pollution, as a significant source of environmental contamination, is characterized by its regional, structural, complex, and interrelated nature. This study uses panel data models to test the impact of water pollution on corporate Environmental, Social, and Governance (ESG) performance, with a sample of listed companies in China (2016–2023). ESG refers to an indicator that assesses a firm’s comprehensive performance across three dimensions: environmental protection, social responsibility, and corporate governance, reflecting its capacity for sustainable development and fulfillment of social responsibilities. This study employed two methods, Bloomberg-Sino-Securities and Bloomberg-Wind, to measure corporate ESG. The findings reveal that water pollution has a significant positive effect on corporate ESG performance. Heterogeneity analysis further identifies that the positive impact of water pollution on ESG performance is more pronounced in regions with low levels of water pollution, in non-polluting industries, and where there is high public environmental awareness, robust environmental regulation, strong local enforcement, as well as among state-owned enterprises and those with high levels of external attention. These conclusions carry important implications for improving corporate environmental management strategies and advancing urban sustainable development.