ESG Performance, Artificial Intelligence Adoption, and Knowledge Diversification: Pathways to Sustainable Innovation Capability

Against the backdrop of the global shift from scale-driven competition to innovation-driven development, together with the dual trends of climate governance and digital transformation, whether firms can transform ESG performance into sustainable innovation capability has become a central question in assessing the real economic value of ESG practices. Using panel data of Chinese A-share listed companies from 2009 to 2025, this study constructs a two-way fixed-effects model to systematically examine the effects of overall ESG performance and its three dimensions, namely, Environmental (E), Social (S), and Governance (G), on corporate sustainable innovation capability. Furthermore, this study incorporates artificial intelligence (AI) adoption and knowledge diversification (TD) into a unified analytical framework and investigates their roles as parallel mediating mechanisms. The results show that overall ESG performance is positively related to corporate sustainable innovation capability. In the joint regression, all three ESG dimensions have positive effects, with the social dimension exhibiting the largest marginal effect. Artificial intelligence adoption and knowledge diversification constitute two parallel and complementary transmission channels through which ESG enhances sustainable innovation capability. Further analyses find that higher ESG levels are positively associated with corporate sustainable innovation capability, whereas rapid short-term improvements in ESG are negatively related to corporate sustainable innovation capability. It shows that innovation performance experiences short-term pressure before a substantial ESG improvement but gradually surpasses its previous level afterward, indicating the existence of genuine short-term adjustment costs in ESG-driven innovation. This study simultaneously incorporate artificial intelligence adoption and knowledge diversification into the mechanism analysis of the ESG–innovation relationship, providing more fine-grained micro-level evidence on how ESG is transformed into real productive capacity. The findings offer important implications for firms’ differentiated ESG investment strategies and the coordinated design of innovation and sustainability policies.