ESG-driven supply chains: A path to energy transition

The energy transition in manufacturing depends not only on cleaner technologies but also on whether sustainability-related incentives flow through supply chain relationships and drive green innovation. This study examines whether corporate ESG performance promotes green innovation within the company and across its connected supply chain, using matched supplier customer data for Chinese A share manufacturing companies from 2009 to 2021. It was found that: (1) Better ESG performance is associated with stronger green innovation in the focal company, with increases of 6.96 per cent in innovation quantity and 6.20 per cent in innovation quality. (2) Within the supply chain, the stronger transmission runs from downstream companies to upstream companies. Downstream ESG performance is associated with increases of 15.63 per cent in green innovation quantity and 11.06 per cent in green innovation quality in upstream companies, while the reverse direction is not robustly supported. (3) Financing constraints, equity financing costs, debt financing costs, media attention, and institutional investor supervision help explain this pattern. (4) The effect is stronger outside the “two high and one surplus” sectors and in regions with higher financial development and market liberalisation. ESG-induced green innovation is also associated with higher patent complexity, suggesting short-term economic value. These findings indicate that ESG can support the energy transition not only through company-level governance, but also through downstream-led supply chain transmission that strengthens green innovation incentives.