Corporate Environmental, Social, and Governance (ESG) performance is increasingly important, with companies recognizing the benefits of improved reputation, market value, and sustainable practices. However, ESG activities require substantial financial resources, necessitating financial instruments like green bonds. Green finance, including green bonds, is gaining global recognition as crucial for achieving the Paris Agreement goals. In China, green finance is a policy initiative aimed at fostering environmental protection and economic coordination, channeling capital towards environmentally friendly companies. Green bonds, a dominant instrument in green finance, are designed to fund climate change and sustainable development projects. The Chinese green bond market, spurred by government encouragement, has seen significant growth since 2016, as evidenced by the upward trend in issuance size and value. For corporations, issuing green bonds serves as both a financing strategy and a response to environmental pressures. Previous studies suggest green bonds signal sustainable development and can lead to reduced carbon emissions and improved environmental ratings. While the positive correlation between green bond issuance (GBI) and ESG performance has been noted, the underlying mechanism remains unclear. This paper aims to address this gap by exploring the impact of GBI on corporate ESG performance, focusing on the mediating roles of internal attention and external supervision, using data from 830 Chinese listed firms between 2012 and 2020.

Existing research on ESG explores its determinants and effects. Studies show that ESG activities can boost corporate reputation and market value but require substantial financial resources. Green finance is increasingly recognized as vital for achieving ESG objectives. Green bonds, a key component of green finance, are designed to fund environmentally friendly projects. The literature presents contrasting perspectives on corporate motivations for issuing green bonds: the 'signal perspective,' where GBI signifies a genuine commitment to environmental sustainability, and the 'greenwashing perspective,' suggesting GBI may be opportunistic without substantive actions. The majority of studies support the signal perspective, demonstrating the effectiveness of green bonds in reducing carbon emissions, improving environmental ratings, and easing financial constraints for green innovation. However, a deeper understanding of the mechanism linking GBI to corporate ESG performance is lacking. This paper, therefore, aims to contribute to the literature by investigating the impact of GBI on ESG performance and exploring its underlying mechanism through the lenses of stakeholder theory (which emphasizes maximizing all stakeholders' interests) and neo-institutional theory (which highlights the importance of organizational legitimacy and social acceptance).

The study employs a staggered difference-in-difference (DID) model to analyze data from 6432 firm-year observations of 830 A-share firms listed on the Shanghai and Shenzhen Stock Exchanges between 2012 and 2020. Firms issuing green bonds form the treatment group, while a control group comprises non-financial firms from six major sectors. The key independent variable is the interaction term between a dummy variable for GBI (GB) and a post-GBI dummy variable (Post). The dependent variable is corporate ESG performance (LNESG), measured using Bloomberg's ESG scores and its component scores (environmental, social, and governance). Internal attention (IA) is proxied by the frequency of environmental terms in corporate annual reports, and external supervision (ES) is represented by the number of media mentions. Control variables include firm size, return on assets, leverage ratio, cash flow, board independence, largest shareholder's shareholding ratio, firm age, institutional ownership (state-owned enterprises), and a market index. The baseline regression model incorporates firm, year, and industry fixed effects. To test the mediating effects of internal attention and external supervision, a two-stage regression model is used. Robustness checks include parallel trend tests, propensity score matching, placebo tests, industry adjustments, and alternative ESG score measures. The study also conducts heterogeneity analysis to explore the differential impact of GBI across firms of different sizes, subsidy levels, and executive environmental experience.

The baseline regression results consistently show a significantly positive relationship between GBI and corporate ESG performance. The coefficient of the GB*Post interaction term remains positive and statistically significant after controlling for various firm characteristics and fixed effects, supporting Hypothesis 1. The parallel trend test confirms the validity of the DID approach. Propensity score matching further strengthens the robustness of the findings. Placebo tests also confirm the causal relationship. Industry adjustments and alternative ESG score measures further validate the findings. The mediating effects analysis reveals that GBI positively influences ESG performance through both internal attention and external supervision. Increased GBI enhances internal environmental attention, leading to improved ESG performance. Additionally, GBI increases media coverage and external scrutiny, putting pressure on firms to improve their ESG practices. Heterogeneity analysis shows that the positive effect of GBI is more pronounced in larger firms, firms receiving higher government subsidies, and firms with executives having environmental experience. Finally, an extended analysis reveals that GBI enhances firm valuation, as indicated by a positive correlation between GBI and Tobin's Q and market-to-book ratio.

The findings support the signal perspective on green bond issuance, indicating that GBI signals a genuine commitment to improving ESG performance. The study's results align with and extend previous research. Unlike many prior studies that focus on green bond market dynamics, this research uses firm-level data to directly examine the impact on ESG performance. The findings provide strong evidence for the positive influence of GBI on ESG performance in the context of China, offering valuable insights for developing economies. The study's contribution lies in deconstructing the mechanism linking GBI to ESG performance. The identification of internal attention and external supervision effects, using a mediation model, extends existing theoretical frameworks (upper echelons and neo-institutional theories). The study highlights the importance of executive environmental awareness and external monitoring in driving ESG improvements after green bond issuance.

This paper demonstrates a significant positive relationship between green bond issuance and corporate ESG performance in China, robust across multiple analyses. The mechanism involves both increased internal attention and external supervision. Policy implications include improving the green bond market system, providing incentives to issuers, and promoting ESG disclosure. For corporations, the key is strengthening governance, enhancing environmental awareness, improving green bond financing evaluation, and increasing transparency. Future research should consider broader geographical contexts and explore additional mediating mechanisms.

The study's limitations include the focus on Chinese listed companies, limiting the generalizability to other countries and contexts. Furthermore, the study explores only two key mediating mechanisms, potentially overlooking other contributing factors. Future studies could explore the role of other potential mechanisms.