The green divide: Analyzing how environmental decentralization shapes corporate ESG performance in China

Environmental decentralization, as a key institutional arrangement, holds significant potential to enhance corporate ESG performance. This study first proposes a theoretical model to assess the impact of environmental decentralization on corporate ESG performance, drawing on the principal-agent framework and Melitz’s (2003) heterogeneous firm model. Secondly, utilizing panel data from 280 Chinese cities and 2,930 listed firms, this paper explores the effect of environmental decentralization on corporate ESG performance through fixed effects model, staggered Difference-in-Differences, and Heckman’s two-stage model, among others. This research highlights the following main conclusions: First, environmental decentralization significantly enhances corporate ESG performance. Second, environmental decentralization improves corporate ESG performance through mechanisms such as local government environmental incentives, public environmental concern, investor attention, corporate green technology innovation, and corporate information transparency. Third, environmental decentralization exerts differential effects on corporate ESG performance depending on contextual factors.