Does central environmental protection inspection improve corporate environmental, social, and governance performance? Evidence from China

Abstract The analysis of the impact of central environmental protection inspection (CEPI) on corporate environmental, social, and governance（ESG) performance is important for reforming the operation mechanism of CEPI to improve its effectiveness and fundamentally enhance corporate ESG to achieve sustainable development. This paper empirically examines the mechanism of the impact of CEPI on corporate ESG performance using a multi‐period difference‐in‐differences (DID) model with a research sample of 674 listed firms in China from 2013 to 2018. The results show that CEPI can significantly improve corporate ESG performance, and the strengthening of regulation by local governments is a potential channel. The important internal governance mechanisms of foreign and institutional investor shareholding, as well as the external governance mechanisms of analyst following and media coverage, can effectively strengthen the improvement effects. Further analysis also reveals that there are differences in the effectiveness of different inspection approaches, with “look‐back” inspection outperforming routine inspection. Heterogeneity at the firm and regional levels is also a critical factor in causing differences in the effectiveness of ESG performance improvements. This work not only enriches the research on the micro‐effects of CEPI on firms but also provides a reference for firms to improve their ESG performance and use ESG for investment and business decisions.