The existing literature has not reached a consensus regarding the relationship between ESG and corporate performance; in general, the current academic community believes that adverse ESG events in corporates will harm their performance (Krüger, 2015). Through ESG disclosure, companies can effectively enhance the transparency, reduce the degree of corporate information asymmetry, and further enhance investors’ long-term investment interests in companies (Cui et al., 2018). According to the signal theory, the active disclosure of information by listed companies reflects their ability of operation, which clearly sending positive signals to the capital market. Also, through ESG information disclosure, corporates can effectively built their reputation among relevant stakeholder groups, and release their strategic intentions for sustainable development to the outside world (Jeffrey et al., 2019). In addition, ESG activities can also improve the organizational and management capabilities of corporates. Companies with better ESGP are also more attractive to employees, and employees have a higher sense of identity and belonging to that company (Weber, 2014; Huang, 2021). The research of Zhu and Tan, (2022) shows that ESG rating can significantly improve the green innovation ability of corporates by reducing financing constraints and improving managers’ environmental awareness (Ali et al., 2022; Hussain et al., 2022). Therefore, this leads us to the first hypotheses as follows:

Hypothesis 1:

There is a negative relationship between ESGP and corporate performance.

The impact of ESG on corporate financial risks can be mainly explained via corporate governance and financing capacity. On one hand, the ESG governance concept can promote the dispersion of corporate stock equity and gender balance in management, and diversifying corporate equity can effectively improve the risk-taking level of the company (Faccio et al., 2011), and an excellent organizational structure can ensure scientific corporate decision-making. Meanwhile, management diversification can also improve corporate risk management. Companies led by male CEOs are usually willing to invest in projects with higher risks (Faccio et al., 2016), while a higher proportion of female board members can effectively promote the inhibitory effect of ESGP on corporate financial risks (Shakil, 2021). In addition, ESG disclosure by corporates can effectively reduce the risk of financial irregularities (Yuan et al., 2022). Corporates that attach importance to ESG activities can also reduce possible business contingencies, such as a lower probability of being prosecuted (Hong and Liskovich, 2015), a stronger adaptive capacity, and lower chance to face stock price crash (Andersson et al., 2012; Lins et al., 2017; Broadstock et al., 2020).

On the other hand, improving their ESGP, corporates can effectively enhance their attractiveness in the capital market. Higher ESGP would lead to lower both corporate equity financing costs (El Ghoul et al., 2011) and debt financing cost (Raimo et al., 2021). Due to the environmental protection and green financial concept, banks are more inclined to issue loans to corporates that disclose CSR information (Xu et al., 2021; Fu et al., 2022), the quality of non-financial information disclosed by corporates is positively correlated with the actual value of corporates. Also, considering the legitimacy of corporates (Hong and Kacperczyk, 2009), especially in European and American capital markets, institutional investors are keener to invest in companies with better CSR performance (Graves and Waddock, 1994; Mahoney and Roberts, 2007). Moreover, corporates’ participation in ESG activities is positively related to the issuance of green bonds and their own credit ratings (Flammer, 2021). The less attention a corporate pays to ecological protection, the lower its credit rating will be, and the higher its debt financing cost will be (Zerbib, 2019). This leads us to the second hypothesis:

Hypothesis 2:

Financial risk mediates the relation between ESGP and corporate performance.

The firm life cycle theory holds that for corporates in different life cycle stages, their environment, structure, strategy formulation, and decision-making methods are different (Miller and Friesen, 1984; Adizes, 1990; Dickinson, 2011). With their continuous development, corporates’ earning capacity gradually decreases, while the probability of business changes gradually increases (Lev and Zarowin, 1999). There are more than 20 definitions and determinants standards of firm life cycle now (Miller and Friesen, 1984; Adizes, 1990), scholars such as Drazin and Kazanjian. (1990) believe that using three-level (growth, maturity, and decline) or four-level (start-up, growth, maturity, and decline) classification criteria can more accurately measure the life cycle of a corporate (Drazin and Kazanjian, 1990). For the listed corporates, the start-up stage is usually combined with the growth stage, and therefore they go through only three stages: growth, maturity, and decline. Considering the distribution hypothesis problems caused by using the single indicator method and comprehensive indicator method, as well as the possible errors caused by profitability indicators (Spence, 1981; Wernerfelt, 1985; Anthony and Ramesh, 1992), Dickinson (2011) adopts operating cash flow, investment cash flow, and financing cash flow to comprehensively judge the firm life cycle perspective (Dickinson, 2011). As a vital issue in corporates’ current long-term development strategy, ESG also requires a detailed analysis of different life cycles (Anthony and Ramesh, 1992).

There are few studies on the ESGP of growing companies. Although growing corporates have the advantages of higher development flexibility and faster operating income growth, meanwhile, their low market negotiation ability and low policy influence also limit their development. Due to the lack of a sound management mechanism and resources, corporations in the growth and growth stages focus more on solving current development problems and rarely take the initiative to fulfill corporate social responsibility (Retolaza et al., 2009). On the other hand, Desa and Basu’s research shows that obtaining financing is critical for corporates in the growth stage to grow and develop (Desa and Basu, 2013). Corporates in the growth stage have a higher degree of information asymmetry in the capital market due to their novel technology or profitability model, making it more difficult to raise external financing (Vogt, 1994), and making ESG disclosures can enhance investors’ interest in the Corporates, which in turn can lead to a relatively stable financial position.

Corporates at maturity stage have the characteristics of large production scale and diversified business scope, and have already occupied a certain position in the market (Edwards, 1955; Hoskisson et al., 1993). Compared with growth stage companies, mature companies are usually under more pressure from society and need to improve their legitimacy by disclosing non-financial information (Dorfleitner et al., 2015; Drempetic et al., 2020). At the same time, mature companies are more willing to invest capital in ESG activities to obtain long-term benefits in the future. Research by Drempetic et al. (2020) also shows that firm size is positively correlated with firm ESGP (Drempetic et al., 2020). However, according to the free cash flow theory, mature companies are prone to over-investment when their financial conditions are relatively relaxed (Jensen, 1986; Triantis, 1994; Saravia, 2014), and the ESG disclosure of corporates may alleviate the agency problem faced by mature corporates.

Corporates in the decline stage usually experience a decrease in sales and a decline in market share. Due to the lack of new profit growth points, corporate cash flow shrinks. Compared with companies in the growth and mature stages, companies in decline stage are more likely to face financial distress (Ang and Smedema, 2011). However, to find new profitability, companies in decline stage are urgently required to invest a lot of money to develop new products and conduct operational promotion (Mourdoukoutas and Stefanidis, 2021). The expanding capital demands on the expenditure side of corporates and the obstacles faced by the financing side will make them more cautious in choosing investment targets. ESG activities will bring greater capital pressure on them, and corporates facing increasing survival pressure may not be able to undertake social responsibilities.

In general, we believe that corporates have different business objectives and encounter different risks at different life cycle stages, the impact of ESG in different life cycle stages has not been fully discussed. Therefore, the following hypotheses are proposed in this paper:

Hypothesis 3a:

For corporates at the growth stage, financial risk cannot mediate the relation between ESGP and corporate performance.

Hypothesis 3b:

For corporates at the maturity stage, financial risk mediates the relation between ESGP and corporate performance.

Hypothesis 3c:

For corporates at the decline stage, financial risk cannot mediate the relation between ESGP and corporate performance.

Based on data availability, this study uses the annual panel data of Chinese A-share listed companies from 2010 to 2020 as the study sample. Except for the Huazheng ESG data from the Wind database, we obtain all other financial data from China Stock Market & Accounting Research database (CSMAR). To ensure the validity of data, samples are screened according to the following principles: (1) samples of corporates with irregular transactions were excluded; (2) samples of corporates in the financial industry and real estate industry are excluded; (3) samples of corporates with asset-liability ratio greater than 1 were excluded; (4) samples with missing values on regression variables were excluded. Therefore, a total of 11,742 firm-year observations for 1,486 firms were finally obtained. In addition, to reduce the influence of outliers on the empirical results, all continuous variables in the paper are winsorized at the 1% and 99% quantiles.

To test the mediation effect of financial risk on the relationship between ESGP and corporate performance, this study refers to the approach provided by Baron and Kenny (1986), the following steps establishing the mediation test:

Firstly, we conduct the regression model between ESG and corporate performance below: C P i t = α + β 1 E S G i t + C o n t r o l i t + θ t + θ n + ε i t (1)

Secondly, we conduct the regression model between ESG and financial risk below: Z s c o r e i t = α + β 2 E S G i t + C o n t r o l i t + θ t + θ n + ε i t (2)

Thirdly, we conduct the regression model between ESG、financial risk, and corporate performance below: C P i t = α + β 3 E S G i t + β 4 Z s c o r e i t + C o n t r o l i t + θ t + θ n + ε i t (3)

Moreover, for test moderate effect, we conduct the modified regression model below: C P i t = α + β 5 E S G i t + β 6 Z s c o r e i t + β 7 E S G i t × Z s c o r e i t + C o n t r o l i t + θ t + θ n + ε i t (4) Among these formulas, the subscript t represents the year, i represents the corporate. This study focuses on the coefficient β 1 , which reflects the impact of ESG on corporate performance. Besides, when coefficient β 1 is significant, the indirect mediation effect is equal to the product of coefficient β 2 × β 4 , and the direct mediation effect is the coefficient β 3 . We estimate the model using ordinary least squares (OLS) with industry and year fixed effects, θ t represents the year effects, θ n represents the industry effects. To control for heteroscedasticity, we correct the standard errors for the clustering of residuals at the firm level.

We carry out F-test, unit root test (Fisher test), Wald and Wooldridge test on panel data respectively, and the results in Tables 3, 4 show that the data of sample has strong individual effect, autocorrelation, and heteroscedasticity. After the Hausman test on the data, we choose to use the fixed effect model to estimate the data, and use the company level clustering robust standard error to reduce the impact of the variance of the disturbance term on the empirical results.

Table 5 reports the descriptive statistical results of the main variables. The Tobin’s Q mean value of the sample corporates is 2.295, the variance is 1.884, and the median is 1.747, indicating that the overall value level of the sample corporates in the financial market is high. The average ESG rating of the sample corporates is 6.299, the standard deviation is 1.057, and the median is 6, which proves that the ESG rating of the sample corporates is between BB-AA. At the same time, we divide the samples into three groups: growth stage, maturity stage, and decline stage according to the division standard of corporate life cycle stages, and test the significance of the mean difference between the groups on the main variables. As shown in Table 6, the ESG rating of corporates in the maturity stage is the highest, followed by the growth stage and the decline stage. Financial risk is significantly higher for corporates in the growth stage relative to corporates in the maturity and decline stages. In addition, corporates in the maturity and decline stages have higher corporate performance relative to corporates in the growth stage.

To further explore the non-linear relationship between ESGP and corporate performance, this part adds the quadratic term (ESG²) of ESGP to formula (1) for regression. The Table 14 shows that the regression using the full sample data reveals that after adding the quadratic term, ESGP is still significantly positively correlated at 1% level. The coefficient on ESG² is significantly positive at the 1% level, which indicates that there is a U-shaped relationship between ESG and corporate performance implying there is an extreme value for the promotion of corporate performance by ESG. When the ESG rating exceeds this extreme value, corporate performance increases more with the improvement of ESG rating. At the same time, columns (2), (3) and (4) show the regression results using different life cycle sub samples. The coefficients on ESG and ESG² are least significant at the 5% level, which also proves that there is a non-linear relationship between ESGP and corporate performance at any stage of the firm life cycle.

At present, Chinese corporates’ ESG ratings greatly rely on the corporates’ ESG and CSR reports disclosed by corporates themselves, meanwhile the China Securities Regulatory Commission (CSRC) has not yet issued a unified ESG information disclosure standard. Therefore, the quality of corporate information disclosure will greatly affect the trust of stakeholders in the ESG rating of corporates which then impacts the investment interest of investors. To test the moderate effect of the quality of corporate information disclosure, we use the four-grade rating index of the Shanghai Stock Exchange and Shenzhen Stock Exchange on the quality of information disclosure of listed companies as the proxy variable (DQ) of the quality of corporate information disclosure (A = excellent, B = good, C = pass, D = fail). Also, considering the heterogeneity of the firm life cycle, data of three sub samples of growth, maturity, and decline are used for regression. The results in Table 15 show that the higher the degree of truthful, accurate, complete, timely, and fair disclosure of information by listed companies, the more acceptable the ESGP by relevant stakeholders. Adequate corporate information transparency represents good internal management (Forker, 1992) and it also compensates for the disadvantaged position of investors due to information asymmetry (Luo et al., 2019). The higher the degree of investors’ trust in corporate ESG disclosure, the greater the improvement of ESGP on corporate performance.

Previous research has found that in the face of the complex and changeable external business environment, corporates often adopt conservative financial policies and retain certain excess financial resources to deal with risks (Guo et al., 2020). We use the equity liability ratio divided by the current ratio to measure the financial slack (Xiaofang, 2017). The degree of financial slack of a corporate reflects its financial flexibility, which is the ability of a corporate to meet its capital needs with low risk. Table 16 shows that the coefficient of the interaction term (ESG*FS) between ESG and financial slack in the full sample regression is significantly negative, which indicates that the impact of corporate financial slack on the relationship between ESG and corporate performance has a significant negative moderate effect. In other words, for corporates with low financial freedom and weak ability to meet their own capital needs, ESG has a greater role in promoting corporate performance. ESG can effectively improve the ability of corporates with low financial freedom to raise funds from outside, thus reducing the dependence of corporates on internal financing. Further distinguishing between different life cycle stages, for the mature corporates, financial slack has a significant negative moderate effect which might imply that although mature corporates have a strong ability to obtain capital (Brody and Ehrlich, 1998), excessive levels of corporate financial flexibility lead to slack management and increased agency costs (Triantis, 2000). However, at the growth and decline stages, the situation of high financing constraints and poor financial liquidity, corporates be compelled to execute relatively conservative financial policies to keep redundant financial resources which can buffer the risks caused by sudden changes in the external environment.

Previous studies have shown that business strategies are closely related to the market environment in which the corporate is operate (Ward and Lewandowska, 2008). When the business environment is order and stable, the corporate is usually better able to confirm the current market situation and make correct business decisions. Otherwise, the corporate will pay more adaptation cost. We use the fluctuation of corporate sales as the proxy of environmental uncertainty (EU), which is the standard deviation of the sales revenue of the sample corporates in the past five years after excluding the normal growth part and industry adjustment (Ghosh and Olsen, 2009; Shen and Yu Peng, 2012). The higher the EU value, the stronger the environmental uncertainty faced by the corporate. Table 17 shows that environmental uncertainty has a significant weakening and restraining effect on the impact of ESG on corporate performance. For corporates with low operating environment uncertainty, ESG has a greater role in promoting corporate performance. This indicates that when the business environment is uncertain, the competition among corporates is more intense, which makes them reduce their investment in ESG, loosening the close connection between the corporate and relevant stakeholders, which eventually affects the corporate performance. On the contrary, when the business environment is stable, the competitive pressure on the corporate is less, and has the spare power to invest in the ESG field to improve the corporate image. For growth stage corporates, due to the higher flexibility in business strategies, corporate can better adjust the direction of operation in complex business environments.