When does ESG matter? Industry heterogeneity of the ESG-firm value relationship in Chinese market

Abstract

Environmental, Social, and Governance (ESG) considerations have gained substantial prominence in global capital markets. However, the relationship between ESG performance and firm value remains contested. While some studies highlight the value-enhancing effects of ESG through improved stakeholder trust and reduced risk, others point to its potential costs or question its financial relevance. Using a panel dataset of 15,410 firm-year observations from A-share listed firms in China (2017–2024), this study examines how ESG performance affects firm value and how these effects vary across industries. The analysis shows that ESG performance is positively associated with firm value overall, and the effect strengthens significantly over a two- to five-year horizon, suggesting that ESG investments require a long gestation period to yield financial benefits. To capture industry heterogeneity, we classify firms into four groups based on ESG materiality dimensions (environmental exposure, institutional embeddedness, and economic structure), following frameworks widely used in ESG research and by rating agencies such as MSCI and SASB. Subsample regressions reveal clear cross-sector variation: ESG contributes positively in environmentally driven and compliance and trust-driven industries, negatively in cost and efficiency-driven industries, and has no significant impact in innovation- and digitally driven sectors. These findings demonstrate that ESG is not a one-size-fits-all value driver but a context-dependent strategic asset, with its financial returns materializing primarily over the long term.