Empowering ESG: The pivotal influence of directors' and officers' liability insurance on corporate sustainability

Using annual data from Chinese A-share listed companies between 2009 and 2023, this paper investigates the impact of Directors' and Officers' (D&O) liability insurance on corporate Environmental, Social, and Governance (ESG) performance, as well as the underlying mechanisms. The results show that D&O liability insurance significantly improves corporate ESG performance, and this finding remains robust after a series of robustness checks. Furthermore, we unveil the 'black box' through which D&O liability insurance enhances ESG performance. Further research findings indicate that the impact of D&O liability insurance on corporate ESG performance exhibits significant heterogeneity. Specifically, the level of regional green finance development, institutional investor shareholding, and tax incentive levels enhance the positive influence of D&O liability insurance on corporate ESG performance. In contrast, for heavily polluting industries, the improvement effect of D&O liability insurance on ESG performance is notably weaker compared to non-heavily polluting industries. Lastly, we explored the impact of the COVID-19 pandemic on this relationship and found that during the pandemic, the positive effect of D&O liability insurance on corporate ESG performance was significantly weakened. This suggests that in the context of a global crisis, companies prioritize short-term survival goals over long-term sustainable development objectives. This study not only contributes to the literature on risk transfer mechanisms but also deepens the understanding of how D&O liability insurance enhances corporate ESG performance.