Environmental liability insurance and corporate ESG performance: Evidence from China

Aim/purpose – This study examines the role of market-based environmental instruments in corporate governance by assessing the association between Environmental Liability Insurance (ELI) and corporate environmental, social, and governance (ESG) performance in China’s transitional emerging market.

Design/methodology/approach – Utilizing a comprehensive panel dataset of Chinese A-share listed firms from 2021 to 2024 (yielding 19,185 firm-year observations), the study employs a two-way fixed-effects (TWFE) model. To address observable selection con-cerns and assess model sensitivity, the study implements propensity score matching (PSM) and a placebo test with randomized treatment assignments.

Findings – The results document a positive short-term association between the base-line Insur indicator and corporate ESG performance, primarily in linear fixed-effects specifi-cations. Channel analyses suggest that this association is consistent with two possible short-term channels: lower observed regulatory-risk exposure and lower agency costs, which serve as a proxy for internal governance efficiency. However, the ordered logit sensitivity check is statistically insignificant, indicating that the main finding is sensitive to treating ESG strictly as an ordinal outcome. Heterogeneity analyses provide suggestive evidence of variation across ownership and regional settings, while most subgroup dif-ferences are not statistically significant in formal interaction tests.

Research implications/limitations – This research suggests that ELI may be associated with governance-relevant monitoring functions and that the positive net association is more consistent with a monitoring interpretation than with an unmitigated moral-hazard interpretation. However, the observational design, short 2021-2024 window, low volun-tary ELI penetration, and potential early-adopter selection limit causal interpretation and the evaluation of long-term environmental outcomes.

Originality/value/contribution – This study provides novel micro-level empirical evi-dence conceptualizing environmental insurance as a quasi-regulatory monitoring mech-anism. It extends the literature on insurance-based governance by utilizing the post-2020 standardized ESG rating window to evaluate short-term organizational compliance re-sponses, shifting the focus from broad aggregate green finance metrics to the micro-governance dynamics of risk-pricing instruments.