ESG and firm performance in China: Direct effects and the moderating effect of internal control quality in capital-intensive sectors

This study examines the relationship between ESG practices and corporate performance in China’s capital-intensive industries and evaluates whether internal control quality moderates these associations. Drawing on stakeholder theory, agency theory, and institution theory, the analysis distinguishes between an external perspective and an internal perspective in understanding ESG-related performance patterns. Under the external perspective, performance is assessed using ROA and Tobin’s Q, while under the internal perspective, the analysis focuses on firm-level implementation and operational transformation, captured through employee productivity, with internal control quality reflecting governance and execution capacity. Using a balanced panel of 1718 A-share listed firms in manufacturing, construction, and transportation from 2020 to 2023, ESG scores are obtained from the HuaZheng database, firm performance and control variables from CSMAR, and internal control quality from the DIB database. Two-way fixed effects regressions are used to estimate baseline ESG-performance associations, and interaction models with simple-slope analyses are used to examine moderating patterns. The results show that ESG practices are negatively associated with ROA and Tobin’s Q, while the association between ESG practices and employee productivity is not statistically significant in the baseline model. Internal control quality positively moderates the ESG relationships with ROA and employee productivity, but not with Tobin’s Q. Overall, the findings highlight the importance of governance capacity and implementation credibility in shaping how ESG commitments are translated into performance outcomes in capital-intensive industries.