ESG Ratings and Corporate Green Technological Innovation Efficiency. Evidence from South Africa

Abstract

South Africa’s low-carbon transition depends critically on firms’ ability to improve green technological innovation efficiency (GTIE), which is essential for cleaner production and long-term emissions mitigation. However, whether market-based ESG ratings promote green technological innovation efficiency remains underexplored, particularly in emerging market contexts. Using panel data from non-financial firms listed on the Johannesburg Stock Exchange from 2010 to 2023, this study employs two-way fixed-effects models, complemented by instrumental variables, propensity score matching, and Heckman two-stage approaches, to examine the impact of ESG ratings on GTIE. The results reveal that ESG ratings have a positive and statistically significant effect on green technological innovation efficiency. This conclusion still holds after a series of robustness tests. Mechanism analysis indicates that this effect operates through enhanced customer stability and reduced debt financing costs, which together improve firms’ ability to sustain and efficiently allocate innovation resources to research and development. The heterogeneity results show that the positive effect of ESG ratings on green technological innovation efficiency is more pronounced among large firms and firms operating in low-pollution industries. Further analysis reveals that digital transformation strengthens this relationship by improving firms’ ability to convert ESG ratings into higher green technological innovation efficiency. Overall, the findings demonstrate that ESG ratings can serve as a critical market-based instrument for improving the efficiency of green technological innovation, with important implications for firms and policymakers in emerging economies.