The signaling power of ESG reports: How corporate sustainability disclosure shapes investment decisions in China

Highlights

• ESG disclosure quality significantly influences investment decisions in China, reinforcing its role in shaping modern financial markets.
• Concentrated ownership structures and advanced market conditions amplify the impact of high-quality ESG reporting on investment choices.
• Institutional factors play a crucial role, with mediation effects accounting for 34.5 % of the relationship between ESG disclosure and investment behavior.
• ESG disclosure standards align with capital allocation to achieve sustainable development goals.
• Contextual conditions, such as governance and market maturity, are essential for maximizing the benefits of ESG transparency.

Abstract

Corporate ESG (Environmental, Social, and Governance) reports are increasingly influencing investment decisions by providing transparency on firms’ sustainability practices, which investors use to assess long-term risk and value. As regulatory frameworks and market awareness evolve, investors are progressively favoring companies with strong ESG disclosures, aligning capital allocation with sustainable development goals. In this context, this paper examines how the quality of ESG (Environmental, Social, and Governance) reporting affects investment choices in China. The empirical results significantly enhance the knowledge of the increasing relevance of company ESG disclosures in modern financial markets while also offering vital suggestions for future study and policy formulation. The methodological framework improves ESG research by looking closely at mediating and moderating effects, using the institutional contingency viewpoint, and coming up with new ways to look at contextual factors. The findings show that companies with concentrated ownership and more advanced market conditions amplify the significance of high-quality ESG reporting, with a mediation impact accounting for 34.5 % of the identified connection. Moreover, the favorable interaction effects highlight the significance of institutional factors in enhancing the relationship between ESG disclosure qualities and investing behavior. These results provide significant insights into the contextual aspects influencing ESG performance in contemporary marketplaces.

Introduction

In the backdrop of global climate change, increased awareness of social responsibility, and the standardization of corporate governance, ESG considerations have become essential focus areas in international capital markets. The strategic objectives of the Chinese government, namely “carbon peak” and “carbon neutrality,” in conjunction with its advocacy for a common prosperity agenda and dedication to high-quality development, create a conducive policy framework and practical basis for the incorporation of ESG investment principles (Liu, Dong, Wang, & Taghizadeh-Hesary, 2024). The China Securities Regulatory Commission’s release of the “Listed Companies ESG Information Disclosure Guidelines” enhances regulatory frameworks for ESG disclosures, highlighting the growing significance of ESG factors in the regulatory environment. In this context, doing comprehensive research on how ESG reporting affects investment choices is of considerable theoretical and practical importance.

ESG investment, as an emerging paradigm for sustainable investing, is fundamentally reshaping the investment logic and value orientation within global capital markets. In the context of China’s ongoing capital market reforms, the localization of ESG investment principles exhibits distinctive developmental characteristics. As Chinese companies increasingly strengthen their positions within global value chains, the relationship between the quality of ESG reporting and investment decisions has garnered increasing scholarly attention. Existing literature has examined the interactive dynamics between ESG factors and corporate performance from various angles. Robust ESG performance significantly enhances corporate investment efficiency (Bilyay-Erdogan, Danisman, & Demir, 2024). Wang, Shen, and Li (2023) established that ESG performance has become a critical determinant in stock pricing; Garrido-Ruso, Otero-Gonz’alez, Lopez-Penabad, and Santomil (2024) explored the challenges and alignment issues inherent in the localization of ESG practices.

ESG reports serve as vital information intermediaries that link companies and investors, directly influencing investor decision-making processes (Young-Ferris & Roberts, 2021). In the context of emerging markets, where information environments are often imperfect and market mechanisms underdeveloped, the relationship between the quality of ESG reports and investment decisions is inherently more complex. Unlike developed capital markets, ESG reporting practices in China remain in a nascent stage, with significant potential for improvement in areas such as report standardization, information verifiability, and the overall quality of disclosures. A comprehensive examination of the mechanisms through which the quality of ESG reports affects investment decisions not only advances the theoretical framework in this field but also offers practical insights for enhancing the quality of corporate ESG disclosures and optimizing investment decision-making processes (Tsang, Frost, & Cao, 2023).

The quality of ESG reports plays a crucial role in shaping investment decisions for publicly listed companies in China, a rapidly evolving market characterized by both opportunities and uncertainties. In an increasingly complex and competitive financial landscape, high-quality ESG disclosures are seen as a critical factor in reducing information asymmetry between firms and investors. ESG reports that provide clear, transparent, and reliable information help investors better assess a company’s long-term sustainability and risk profile, thereby influencing their decision to buy, hold, or sell shares (Balp & Strampelli, 2022). Specifically, higher-quality ESG disclosures are positively correlated with greater investor confidence, as they reduce the perceived risk associated with investing in a company, especially in emerging markets like China, where regulatory standards and market practices are still developing (Yu, Farooq, Alam, & Dai, 2024). For instance, companies with robust ESG reporting are often perceived as more transparent and better managed, which can attract long-term investors, enhance corporate reputation, and ultimately improve stock liquidity and market valuation (Grewal, Riedl, & Serafeim, 2019).

In the context of investment decisions, ESG reports also play a significant role in managing both investment risk and return (Kotsantonis, Pinney, & Serafeim, 2016). High-quality ESG disclosures provide valuable insights into a firm’s operational practices, risk management strategies, and future growth potential, all of which directly impact investment risk (Ellili, 2022). By providing investors with detailed information about environmental practices, social initiatives, and governance structures, ESG reports allow investors to better evaluate the non-financial risks that could affect corporate performance. Research suggests that companies with strong ESG performance tend to exhibit lower volatility and less exposure to regulatory fines, litigation, and reputational damage, which, in turn, can reduce overall investment risk (Narula, Rao, Kumar, & Matta, 2024). In addition, a growing body of literature indicates that high-quality ESG reports can positively influence long-term investment returns. Companies that actively manage ESG risks are more likely to outperform their peers in terms of stock price performance, as they align with broader societal goals and meet the increasing demands for sustainability from both consumers and institutional investors (Friede, Busch, & Bassen, 2015). As investors increasingly incorporate ESG factors into their decision-making, those companies with higher-quality ESG disclosures are expected to attract more capital, thus potentially achieving superior financial performance and enhanced returns over time (Berg, Fabisik, & Sautner, 2020).

Moreover, this study measure the moderating role of institutional environment in the nexus between investment decision and ESG reports. The institutional environment plays a significant moderating role in the relationship between investment decisions and ESG reporting by influencing the extent to which firms are incentivized or required to disclose ESG information. In regions or sectors with strong regulatory frameworks, investor pressure, and societal expectations, companies are more likely to prioritize robust ESG reporting, as they face legal obligations or reputational risks associated with non-compliance. Conversely, in environments with weaker institutional frameworks, the link between investment decisions and ESG reporting may be less pronounced, as firms may not perceive ESG transparency as critical to attracting investment or meeting regulatory standards. Thus, institutional factors such as government policies, market norms, and the availability of ESG-related information can either strengthen or weaken the effect of ESG reporting on investment decisions.

The structure of the paper is as follows: Section 2 presents the theoretical framework and outlines the research hypotheses. Section 3 describes the research design in detail. Section 4 provides an in-depth discussion of the empirical analysis, while Section 5 offers an extended analysis. Finally, section 6 concludes the study.

Section snippets

Theoretical analysis and research hypotheses

The analysis of the relationship between ESG report quality and investment choices is based on three core theories: stakeholder theory, information asymmetry theory, and agency theory. Stakeholder theory, first introduced by Freeman (1984), posits that companies must account for the interests of all stakeholders, not only shareholders, in their decision-making processes. This hypothesis has been extensively used to elucidate the function of ESG reporting. This concept posits that high-quality

Sample selection and data sources

This study examines A-share listed companies in China from 2019 to 2023. The selection of 2019 as the initial year is strategically significant, corresponding to the implementation of the “Green Development Index System” and “Ecological Civilization Construction Assessment Target System,” which marked a crucial turning point in China’s ESG practices. This period witnessed substantial improvements in the standardization and comprehensiveness of corporate ESG information disclosure.

The sample…

Descriptive statistics

The study conducts a comprehensive statistical analysis to understand the distributional characteristics and correlational relationships among the research variables. Table 2 presents the descriptive statistics of the main variables. (See Table 3.)

The descriptive statistics reveal that the mean ESG report quality (ESG_Q) is 62.347, with a standard deviation of 15.683, indicating moderate overall ESG performance among listed companies in China, albeit with substantial cross-sectional variation…

Group-based analysis

The study conducts comprehensive group tests examining the relationship between ESG report quality and investment decisions across institutional environments, firm characteristics, and investor attributes. The analysis reveals significant heterogeneity in the effectiveness of ESG reporting across these dimensions.

The institutional environment analysis, based on provincial marketization indices, demonstrates significant moderating effects. In regions with high-quality institutional environments,

Concluding remarks

The empirical findings of this study contribute significantly to both theoretical understanding and practical applications of ESG reporting in emerging markets while revealing important implications for future research and policy development. The demonstrated relationship between ESG report quality and investment decisions extends beyond the traditional information asymmetry framework, suggesting a more nuanced mechanism through which ESG information influences market behavior. The identified

Declaration of competing interest

None…

Acknowledgements

The author gratefully acknowledge the financial support provided by Henan Province Higher Education Teaching Reform Research and Practice Project (2024SJGLX139), and by the National Social Science Foundation of China(22BZZ039).