Environmental, social, and governance (ESG) issues are increasingly important to businesses and academics. Firms disclose ESG information to meet stakeholder expectations, but this information can be manipulated, leading to "ESG decoupling"—a disparity between reported ESG performance and actual actions. Previous research has identified various determinants of ESG decoupling, including regulatory contexts, market pressures, firm characteristics, corporate governance, and psychological factors. However, the role of digital technology in curbing ESG decoupling remains largely unexplored. Corporate digital transformation, the integration of digital technologies across a firm's operations, can significantly impact information generation, processing, and communication. This study investigates whether corporate digital transformation can alleviate ESG decoupling in China, a nation undergoing rapid digital development with strong government support for digital transformation initiatives. The authors hypothesize that digital transformation can restrain ESG decoupling by enhancing managers' ability to prepare accurate ESG reports and reducing their incentive to manipulate them.

The literature review examines existing research on digital transformation and ESG decoupling. Regarding digital transformation, studies highlight its impact on operational efficiency, organizational performance, and innovation. However, research on its effect on ESG decoupling is limited. Concerning ESG decoupling, the review explores its definition, theoretical foundations (legitimacy theory and asymmetric information theory), and determinants (regulatory contexts, market pressures, firm characteristics, corporate governance, and individual psychology). The authors note a gap in the literature regarding the role of technological forces, specifically digital transformation, in mitigating ESG decoupling. They also criticize the use of potentially interdependent ESG databases in previous research and suggest the use of automated textual analysis for measuring ESG decoupling to address this issue.

This study uses data on Chinese A-share listed companies from 2010 to 2019 that disclosed ESG reports. The authors employ a text analysis method to measure corporate digital transformation by analyzing the frequency of keywords related to digital technologies in the Management Discussion and Analysis (MD&A) section of annual reports. ESG decoupling is measured as the gap between the optimistic tone of ESG reports (analyzed using Loughran and McDonald's (2011) lexicon) and actual ESG performance, obtained from the CNRDS database. The study uses regression analysis to examine the relationship between digital transformation and ESG decoupling, controlling for various firm-level and governance characteristics. Further analyses include mechanism tests (examining the mediating roles of internal control and information asymmetry), heterogeneity analyses (exploring regional differences and the impact of GRI guidance), and an economic consequence analysis (examining the effect on total factor productivity (TFP)). The authors conduct robustness checks using alternative measures of digital transformation and ESG decoupling, extending the observation window, excluding potential strategic disclosure effects, and addressing potential omitted variables.

The baseline regression results show a significantly negative relationship between corporate digital transformation and ESG decoupling. This finding is robust to various robustness tests, including using alternative measures for both variables, extending the observation window, excluding strategic disclosure effects, and accounting for omitted variables via province-year fixed effects. Mechanism analysis confirms that the effect of digital transformation operates through two channels: improved internal control quality and reduced information asymmetry. Heterogeneity analyses reveal that the negative relationship between digital transformation and ESG decoupling is stronger for firms located in eastern China and those that do not follow the Global Reporting Initiative (GRI) guidelines. The economic consequence analysis indicates that digital transformation positively impacts firms' total factor productivity (TFP) and that this effect is further enhanced by its ability to reduce ESG decoupling. The study finds that firms without digital transformation exhibit significantly higher ESG decoupling levels compared to their counterparts that embraced digital transformation.

The findings demonstrate that corporate digital transformation plays a significant role in mitigating ESG decoupling. This supports the hypothesis that improved information processing capabilities and reduced information asymmetry contribute to a closer alignment between ESG reporting and actual practices. The regional variations highlight the importance of infrastructural and resource availability in facilitating the effectiveness of digital transformation in curbing ESG decoupling. The finding that the effect is stronger for firms not following GRI guidelines suggests that digital transformation complements, rather than substitutes for, other initiatives aimed at improving ESG reporting quality. The positive relationship between digital transformation, reduced ESG decoupling, and TFP provides strong evidence of the positive economic consequences of aligning ESG reporting with actions. This study provides important evidence for managers, policymakers, and investors alike.

This study contributes to the understanding of ESG decoupling by demonstrating the significant role of corporate digital transformation in its mitigation. The findings highlight the importance of digital technologies in improving ESG information quality and reducing information asymmetry. The study's policy implications include encouraging corporate digital transformation, supporting digital development in less-developed regions, improving ESG governance institutions, and promoting the development of ESG governance systems that integrate digital technologies. Future research could explore the use of more comprehensive measures of digital transformation, more nuanced sentiment analysis techniques for Chinese text, and broader international comparisons to ascertain the generalizability of the findings.

The study's limitations include the reliance on textual analysis for measuring digital transformation, which might not fully capture the complexity of the phenomenon. The use of a specific word list to measure digital transformation might be criticized for its sensitivity. The study focuses on China, and the generalizability of the findings to other contexts may be limited by differences in institutional settings and regulatory environments. The measurement of ESG decoupling relies on a specific sentiment dictionary, which may not capture the full range of sentiment in Chinese ESG reports. Further, the economic consequences are explored only through TFP and may not fully capture the broad spectrum of outcomes associated with ESG decoupling.