From data to sustainability: How digital tools drive manufacturing ESG gains

A new analysis explores how digital transformation is reshaping environmental, social, and governance (ESG) outcomes in the manufacturing sector. The research, published in Sustainability under the title “Does Digital Transformation Improve Manufacturing ESG Performance: Evidence from China”, is based on data from 769 A-share listed manufacturing firms over a 12-year period to quantify both the scale and the mechanisms of this impact.

How digital transformation links to ESG gains

The study finds that digital transformation delivers a clear and statistically significant boost to ESG performance in manufacturing. By applying a combination of baseline regression models, instrumental-variable two-stage least squares (2SLS), Heckman two-stage methods, and propensity score matching (PSM) techniques, the authors provide robust evidence that digital adoption is more than a technological upgrade, it is a strategic pathway toward sustainable value creation.

Three primary mechanisms drive this improvement. First, digital transformation strengthens organizational resilience, enabling firms to respond more effectively to market volatility, regulatory changes, and environmental challenges. This resilience is not limited to crisis response; it also enhances operational stability and long-term adaptability.

Second, the adoption of digital tools accelerates technological innovation, fostering the development of cleaner processes, smarter resource allocation, and more efficient production cycles. This innovation is often targeted toward eco-efficiency and compliance with environmental regulations, amplifying ESG ratings.

Third, digitalization boosts green total factor productivity (GTFP), a measure that captures the interplay between input efficiency, environmental protection, and output quality. Higher GTFP translates to lower emissions, reduced waste, and better energy optimization, all of which feed into improved environmental performance.

Ownership, competition, and policy context

The study also explores how the benefits of digital transformation vary across different types of firms and market conditions. One of the most notable findings is that state-owned enterprises (SOEs) experience stronger ESG gains from digitalization compared to their privately-owned counterparts. This advantage stems partly from a more supportive policy environment, which provides SOEs with access to subsidies, favorable regulations, and strategic guidance on sustainable development goals.

Market competition plays a moderating role as well. In environments with moderate competition, digital transformation’s ESG benefits are maximized. Too little competition can lead to complacency, while overly intense competition may force firms to prioritize short-term profitability over long-term sustainability investments.

The research further emphasizes that firm-specific factors influence ESG performance. Larger firms and those with higher profitability, measured by return on assets (ROA), tend to achieve stronger ESG outcomes. Conversely, firms with high levels of indebtedness face constraints that can dampen their ability to invest in sustainability-enhancing technologies and initiatives.

Strategic and policy implications for a sustainable future

The paper provides actionable insights for policymakers, business leaders, and investors. One clear recommendation is that ESG strategies should be customized rather than standardized. Policymakers are encouraged to tailor incentives, regulatory frameworks, and support mechanisms according to industry characteristics, digital maturity levels, ownership structures, and regional economic conditions.

For small and medium-sized enterprises (SMEs), lowering the barriers to digital adoption is essential. This could include targeted financial support, shared digital infrastructure, and specialized training programs that build capacity for sustainability-driven digital innovation. SMEs, often constrained by limited resources, stand to benefit significantly from affordable access to advanced technologies.

The study also reframes ESG not as a compliance obligation but as a strategic asset. Firms that integrate ESG considerations into their digital transformation roadmaps are better positioned to enhance their market competitiveness, attract sustainability-focused investment, and strengthen stakeholder trust.

The authors caution against short-termism, urging both corporate and governmental actors to view digital transformation as a long-term driver of green growth rather than an isolated technological upgrade. They also highlight the need for ongoing research into AI-driven measurement tools for ESG performance, which could capture sustainability impacts with greater accuracy and predictive capability.