The impact of ESG ratings on corporate investment efficiency in a geopolitical context

Abstract

Purpose This paper examines the impact of environmental, social, and governance (ESG) ratings on corporate investment efficiency amid rising geopolitical uncertainty, while uncovering the underlying transmission mechanisms and heterogeneous effects across firm types, thereby enriching the literature on ESG governance and corporate investment decision-making. Design/methodology/approach This study employs a multidimensional fixed-effects model for the baseline estimation. It further conducts heterogeneity tests based on firm lifecycle, technological attributes, and pollution levels, and examines the transmission channels, including financing constraints, green innovation, management costs, and managerial myopia. Findings Higher ESG ratings significantly reduce inefficient investments and enhance corporate investment efficiency. The positive effects are particularly pronounced in growth-stage, non-high-tech, and non-heavily polluting firms, while they are weaker in high-tech and declining firms. ESG ratings improve investment efficiency by alleviating financing constraints, promoting green innovation, reducing management costs, and mitigating managerial myopia. Originality/value This study links ESG ratings with corporate investment efficiency amid geopolitical uncertainty, thereby enriching the literature on the micro-level economic consequences of ESG practices and corporate investment decisions. It provides empirical evidence for firms to adopt differentiated ESG strategies to enhance investment efficiency and offers implications for policymakers in designing refined ESG governance frameworks in the context of global geopolitical and sustainable development competition.