The impact of the carbon reduction policy effectiveness on energy companies' ESG performance

Abstract

As one of the largest sources of carbon emissions, energy companies are motivated to improve their environmental, social, and governance (ESG) performance to attract investment and meet sustainability goals under the constraints of carbon reduction policies. However, it is currently unclear whether and how carbon reduction policies can help energy companies improve their ESG performance. Therefore, this paper comprehensively examines the impact of carbon reduction policies on the ESG performance of energy companies. First, we use the content analysis method to construct a novel index as a proxy of policy influence based on policy text, i.e., the carbon reduction policy effectiveness (CRPE) index. Then, we empirically examine the impact of CRPE on the ESG performance of energy companies using the panel data of Chinese A-share listed energy companies from 2010 to 2022. The empirical study shows that the CRPE can significantly improve the ESG performance of energy companies and remains robust to robustness tests. Mechanism tests show that it is due to the increase in executives with environmental backgrounds and executive compensation. For the three indicators (E, S, and G) of ESG performance, CRPE promotes environmental and social performance but reduces governance performance. Notably, the effect of CRPE on the ESG performance of clean energy companies and state-owned enterprises (SOEs) is more significant. These findings enrich environmental economic theories and provide a reference for energy companies to promote ESG practices and the low-carbon transition, helping to accelerate the process of carbon neutrality.