Stock market openness and ESG performance: Evidence from Shanghai-Hong Kong connect program

Taking the Shanghai-Hong Kong connect program as a natural experiment, the paper investigates if stock market openness impacts firms' ESG performance. The results show that, the ESG rating of the connected firms improves significantly compared to the non-connected firms, and the improvement is larger in firms with stricter financial constraints, but smaller in stocks with better financial or market performance. The findings imply that since foreign investors value ESG more than domestic investors, the connected firms may promote their ESG performance to cater to the northbound capital, and their catering incentive becomes stronger when their demand is more urgent. In the post-pandemic period, with the continuous challenging from anti-globalization trends, our results suggest that it is of theoretical and practical significance to utilize the positive role of market openness on corporate sustainability. & COPY; 2023 Published by Elsevier B.V. on behalf of Economic Society of Australia, Queensland.