The stability of customer relationships is crucial for firms, particularly in the context of China's focus on a dual circulation development paradigm. This requires resilient and secure industrial and supply chains. Stable customer relationships improve information environments, increase risk-taking, enhance revenue stability, and improve operational efficiency. ESG (Environmental, Social, and Governance) performance has become increasingly important, aligning with national goals and regulatory requirements. The Chinese government's emphasis on ESG and its inclusion in investor relations management underscores its significance. Existing literature shows ESG's positive impact on operational performance, innovation, and risk buffering. This study explores the theoretical link between ESG performance and customer stability using external pressure theory and reputation theory, hypothesizing that improved ESG performance leads to increased customer stability through enhanced internal and external regulation and improved corporate reputation. The study uses data from A-share listed companies in China from 2011 to 2022 to empirically test these hypotheses.

The study draws on external pressure theory, which suggests that stakeholders exert pressure on firms to meet their expectations, particularly regarding environmental responsibility. The pressure to improve ESG performance stems from accountability and the need to satisfy customer demands. Reputation theory highlights the importance of organizational reputation as a valuable asset. Improved ESG performance enhances corporate reputation by signaling commitment to sustainable development and mitigating information asymmetry. Prior research has explored ESG's impact on supply chain performance and corporate value, but there is limited literature directly linking ESG performance to customer stability. The paper therefore proposes three hypotheses: (1) Firms' ESG performance is positively correlated with customer stability; (2) Firms' ESG performance enhances customer stability through strengthening internal and external regulation; and (3) Firms' ESG performance enhances customer stability by improving corporate reputation.

The study employs a two-way fixed-effects model to analyze panel data from A-share listed companies in China from 2011 to 2022. The initial sample is screened to exclude financial and real estate firms, firms with abnormal status, firms without sufficient customer data, and firms with missing control variables. The final sample includes 10,840 observations. Customer stability is measured using two variables: the number of repeat customers (CustomerNum) and the proportion of sales from repeat customers (CustomerSales). ESG performance is measured using Bloomberg ESG scores. Control variables include firm size, leverage, return on assets, asset turnover ratio, cash flow ratio, firm age, top shareholder ownership, and equity balance. Hausman tests support the use of fixed effects estimation. Robust standard errors are clustered at the industry-year level. The study further employs a three-step mediation method to test the mediating roles of internal and external regulation and corporate reputation. Internal and external regulation are measured by an internal control index and information transparency. Reputation is measured by Baidu search index and positive media coverage. An endogeneity test is conducted using instrumental variables – the interaction between industry-year ESG score averages and Confucian cultural influence – to address potential reverse causality. Robustness checks involve replacing the ESG measure with alternative ESG ratings, controlling for time trends, and using different clustering methods. Heterogeneity analysis is conducted based on governance levels, company size, and ESG sub-indicators.

The baseline results show a significantly positive relationship between ESG performance and both CustomerNum and CustomerSales, supporting Hypothesis 1. The mediation analysis confirms that ESG performance positively impacts customer stability through both strengthened internal and external regulation (Hypothesis 2) and improved corporate reputation (Hypothesis 3). Heterogeneity analysis reveals that the positive relationship between ESG performance and customer stability is stronger in firms with high governance levels and smaller sizes. Among the ESG sub-indicators, environmental and social responsibility show a stronger positive impact on customer stability than governance. The instrumental variable analysis addresses endogeneity concerns, confirming the robustness of the positive relationship between ESG performance and customer stability. Robustness checks using alternative ESG ratings and controlling for time trends yield consistent results.

The findings support the hypotheses, demonstrating that ESG performance enhances customer stability through multiple mechanisms. The mediating roles of internal and external regulation and corporate reputation highlight the importance of ESG as a signal of commitment to sustainability and good governance, influencing customer perceptions and loyalty. The heterogeneity analysis suggests that the impact of ESG is more pronounced in specific firm contexts, emphasizing the importance of considering firm-specific characteristics when assessing the impact of ESG on customer relationships. These results contribute to a deeper understanding of the economic implications of corporate social responsibility and the factors influencing customer stability.

This study provides strong evidence that improved ESG performance enhances customer stability through improved regulation and reputation. The findings highlight the importance of ESG for sustainable business practices, suggesting that focusing on environmental and social responsibility can be particularly effective in fostering customer loyalty and improving firm performance. Future research could explore cross-country comparisons, address the impact of different ESG rating methodologies, and delve into industry-specific variations.

The study's focus on Chinese A-share listed companies limits the generalizability of the findings to other contexts. The use of Bloomberg ESG scores as the primary measure of ESG performance, although robustly checked, may still have limitations due to potential variations across different rating agencies. Future research should examine these issues with a more diverse sample and a broader range of ESG metrics.