Does ESG Financing Stimulate Green Innovation and Productivity Growth in the UK?: A Quantitative Analysis of UK Firms (2015-2024)

This study examines the causal relationship between Environmental, Social, and Governance (ESG) financing and both green innovation output and productivity growth among UK firms. Using a comprehensive dataset of 847 publicly listed UK companies from 2015 to 2024, we employ a two-stage least squares (2SLS) instrumental variable approach to address potential endogeneity concerns. The analysis reveals that ESG financing exhibits a statistically significant positive effect on green patent applications (β = 0.342, p < 0.01) and total factor productivity (β = 0.187, p < 0.05). Our findings demonstrate that a 10% increase in ESG financing corresponds to approximately 3.4% increase in green innovation output and 1.9% improvement in productivity metrics. Heterogeneity analysis indicates that the positive effects are more pronounced in technology-intensive sectors and larger firms with established R&D capabilities. Furthermore, we identify innovation quality, measured through patent citations, as a key mediating mechanism linking ESG financing to productivity gains. These results suggest that ESG financing serves not merely as a reputational tool but as a substantive driver of technological advancement and operational efficiency in the UK context. The study contributes to the growing literature on sustainable finance by providing robust empirical evidence of ESG financing's role in fostering green economic transformation.