Implementation of Principles of Sustainable Development Attracts More Investments
Economists from HSE and RUDN University have analysed issues related to corporate digital transformation processes. The introduction of digital solutions into corporate operations reduces the number of patents in the field of green technologies by 4% and creates additional financial difficulties. However, if a company focuses on sustainable development and increases its rating in environmental, social, and governance performance (ESG), the negative effects decrease. Moreover, when the ESG rating is high, digitalisation can even increase the number of patents by 2%. The article was published in Sustainability.
Digital transformation provides businesses with new tools to increase efficiency and competitiveness. Companies apply new technologies for data collection, customer service, and analytics. However, this entails high costs and increases energy consumption, which diverts resources from environmental initiatives. As a result, companies experience mixed manifestations of the ‘double transformation’ effect and have to choose whether to invest in digitalisation or develop green technologies. This problem is especially relevant to Chinese companies. China, one of the largest energy consumers, now faces serious environmental problems. Therefore, companies have to combine the goals of digital modernisation and sustainable development.
The economies of Russia and China are similar, and the experience and strategies used by Chinese companies can be applied to Russian practice. Irina Ivashkovskaya and Yanfei Wu, staff members of the School of Finance at the HSE Faculty of Economic Sciences, together with their colleagues from the HSE Department of Applied Economics and RUDN University, studied how Chinese business is responding to this challenge. They analysed data from 1,443 companies listed on the Shanghai Stock Exchange main board between 2013 to 2022.
The authors determined the level of digitalisation, indicators of sustainable development, financial constraints and their impact on green innovations for each company. To define the level of digital transformation, the researchers analysed companies’ annual reports to determine the frequency of repetitions of more than 70 marker keywords related to digital innovation. Then, they studied the relation between two transformation processes: the level of digitalisation and innovation in technology, expressed by the number of patents in the field of green technologies.
The results show that increasing the level of digitalisation reduces the number of green patents by 4%. This happens due to competition for financial resources between digital and environmental projects. Financial constraints also increase as companies find it difficult to attract investments. Nevertheless, an increase in the ESG rating weakened this effect, increasing the number of patents by 2–3% on average. Companies with a high ESG profile better coped with challenges related to financing and internal allocation of resources.
To get a clearer result, the authors also divided companies into two groups: those with a high and low level of digital transformation. If a business was not engaged in sustainable development and its ESG rating was low, increased investment in digitalisation reduced the number of patents for green innovations by 12%. However, if the company's rating was high, this transition, on the contrary, increased investments in green technologies by 6%. The study shows that the relationship between digital and ESG transformation works differently in public and private companies. In both groups, digitalisation produces financial constraints. However, in state-owned companies, the ESG profile does not have a mitigating effect on the results of green innovation.
The authors note that companies should strategically balance internal resources and not neglect other areas in order to accelerate digitalisation. In addition, regular disclosure of ESG indicators will increase transparency and attract additional funding.
‘Despite the fact that the study was conducted on data from Chinese companies, its results are relevant to Russia as well. Our country has a similar type of economy—in terms of large public companies, resource-based, energy-consuming enterprises dominate, and a significant number of companies are partially owned by the state,’ said Irina Ivashkovskaya, Head of the School of Finance at the HSE Faculty of Economic Sciences.
Yanfei Wu
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