When ESG Outruns Innovation - Explaining the ESG–Innovation Decoupling Gap in Chinese Listed Firms -

Does environmental, social, and governance (ESG) performance align with corporate innovation? Prior research shows mixed results. We propose that institutional pressures and governance structures create divergent trajectories where ESG advances through disclosure while innovation requires substantive investment, producing systematic decoupling. We develop the ESG–Innovation Decoupling Gap construct, measuring year-standardized differences between firms’ ESG performance and innovation output. Analyzing 11,888 firm-year observations of Chinese listed firms (2011– 2021) using two-way fixed-effects models, we find that ownership concentration marginally predicts larger gaps (p = 0.081), while organizational characteristics—firm size and leverage—demonstrate stronger associations. Supplementary cross-sectional analysis reveals pollution-intensive firms exhibit significantly higher gaps than non-polluting firms (p = 0.005). The gap predicts higher future accounting profitability but not market valuation, with effects concentrated in state-owned enterprises. These findings reveal that ESG–innovation divergence stems from organizational structure rather than governance-based strategic choices. We extend institutional decoupling theory by demonstrating that symbolic adoption arises from internal organizational constraints alongside external legitimacy pressures. Our performance findings show symbolic ESG strategies create asymmetric effects—operational efficiency gains without market value creation.