The Beacon of Sustainability: How Do ESG Ratings Improve Corporate Sustainable Development Performance?

ABSTRACT Environmental, social, and governance (ESG) issues are increasingly important in guiding sustainable practices in emerging markets. Despite their growing importance, limited studies have assessed the consequences of third‐party ESG ratings on corporate sustainable development performance (SDP). Grounded in the intuitional theory, we employ SynTao Green Finance's ESG rating events as a quasi‐natural experiment and conduct a difference‐in‐differences analysis. We find that ESG ratings significantly enhance corporate SDP, with these positive effects growing dynamically over time. The findings prove robust after addressing potential endogeneity concerns and other empirical challenges. We further identify three mechanisms through which ESG ratings improve SDP: increased investor attention, alleviated financial constraints, and enhanced green governance. Cross‐sectionally, the SDP effects of ESG ratings are more significant among large companies, heavily polluting companies, and those in the eastern coastal region. This study provides new evidence for the efficacy of ESG ratings as an informal mechanism to promote sustainable development in China, offering valuable insights for other emerging economies.