Purpose – This study examines how environmental, social and governance (ESG) performance relates to firm
profitability in China and whether audit quality conditions thislink. We assess both the direct effect of ESG and
its heterogeneity across state-owned enterprises (SOEs) and non-SOEs. By foregrounding external assurance
and ownership context, the study clarifies when ESG translates into economic value. The goal is to provide
evidence-based guidance for scholars, managers, and policymakers on how credible sustainability practices,
supported by high-quality audits, can enhance firm outcomes in an emerging-market setting.
Design/methodology/approach – We analyze 35,175 firm-year observationsfor Chinese A-share firms(2015–
2024). ESG scores (Huazheng) are rescaled to 0–100 and standardized by year. Baseline models use firm and
year fixed effects with clustered standard errors; interaction models test moderation by audit quality (abnormal
audit fees, ln audit fees, Big-4 and audit opinion). Robustness includes alternative ESG z-scores, lag structures,
SOE versus non-SOE splits and endogeneity checks via two-step system and difference GMM, plus
instrumental variables (local audit market concentration and partner workload). Variables entering interactions
are mean-centered; controls include size, cash flows, leverage, board size and Tobin’s Q.
Findings – ESG performance is positively associated with profitability (ROA/ROE); effects are statistically
robust yet economically moderate. A one-standard-deviation rise in ESG increases ROA by ?0.18–0.19
percentage points and ROE by ?0.65–0.68 points. Dynamic panel estimates indicate short-term gains weaken
once profit persistence is considered, implying benefits accrue through longer-term channels. Audit quality
shows mixed moderation: abnormal (and raw) audit fees reduce profitability but do not consistently strengthen
ESG effects; Big-4 shows limited incremental influence. ESG impacts are stronger for SOEs, while non-SOEs
are more sensitive to audit frictions.
Research limitations/implications – Results pertain to listed Chinese firms and Huazheng ESG metrics;
generalization to private or non-Chinese firms requires caution. ESG ratings and audit proxies may embed
coverage and methodology biases, and audit fees can reflect complexity as well as quality. Although we address
endogeneity using lagged models, IVs, and system/difference GMM, residual identification concerns remain.
Future work could triangulate multiple ESG providers, exploit regulatory shocks or inspection outcomes, and
extend to other markets to test external validity.
Practical implications – Managersshould treat ESG as a long-term investment that enhances profitability when
paired with credible governance and transparentreporting. Prioritize material ESG initiatives,sustain disclosure
quality, and manage audit frictions – especially in non-SOEs – by planning engagements that balance fee levels
with assurance depth. Boards can use abnormal-fee diagnostics to monitor audit complexity and risk.
Policymakers should strengthen disclosure standards and promote reliable assurance to curb greenwashing and
improve comparability, thereby lowering firms’ financing costs and encouraging efficient capital allocation.
Social implications – Trustworthy assurance elevatesthe credibility of ESG disclosures, curbing greenwashing
and aligning corporate actions with societal goals. By clarifying when audits add informational value, the study
supportsinvestor protection, fairer capital markets and more effective progresstoward environmental and social
targets. Strong, transparent ESG practices – verified by credible audits – benefit not only firms and investors but
also employees, communities, and the broader public.
Originality/value – We provide one of the most up-to-date, large-sample analyses for China (2015–2024),
integrating multiple audit-quality proxies and an explicit SOE versus non-SOE perspective within an
institutional-theory framework. The study reconciles mixed prior findings by quantifying economic
magnitudes, testing standardized ESG metrics and deploying dynamic panel estimators. We show that audit
quality’s moderating role is context-dependent, while ESG’s performance benefits are primarily long-term –
offering clear, actionable insights for scholars, regulators, and practitioners.