Sustainability Spending Can Backfire Before It Builds Resilience

Corporate sustainability has acquired the language of inevitability. Better environmental, social and governance performance is commonly treated as a sign of stronger management, lower risk and greater long-term durability. The underlying assumption is that as ESG performance rises, corporate resilience should rise with it.

A study published in Sustainability disputes that straight-line logic. "Empowering Sustainable Development: The Nonlinear Impact of ESG Performance on Organizational Resilience," by Haixia Ren, Yilin Li, Fang Wang, Yanliang Chen and Dana Kangalakova, examines Chinese A-share listed firms from 2009 to 2024 and finds that ESG can initially erode resilience before it begins to strengthen it.

The relationship is U-shaped. As firms move upward from relatively weak ESG performance, resilience declines; after ESG reaches an estimated turning point of about 0.61 on the study's standardized scale, the direction reverses. The implication is more disruptive than a simple threshold statistic: firms can spend more on sustainability and still become temporarily less capable of absorbing shocks.

The study also identifies why the reversal occurs. Total factor productivity acts as a partial transmission channel, while capital-market attention can raise the level of ESG required before resilience improves. Regional results add another complication: the relationship is strongest in China's more developed eastern region, implying that ESG returns depend partly on the surrounding institutional environment.

ESG can create a costly middle zone

Firms do not move from weak ESG practices to mature sustainability systems without incurring organizational costs. Compliance structures must be upgraded, disclosure systems expanded, data gathered, internal controls tightened and management attention redistributed.

Those demands consume resources before they generate returns. Capital committed to reporting, environmental management, governance reform or social compliance is capital that cannot simultaneously be used elsewhere. Management time also becomes fragmented as executives respond to new regulatory, investor and stakeholder expectations.

The study argues that this adjustment phase can reduce operational efficiency and flexibility. Firms may be improving their ESG profile while weakening their near-term capacity to respond to market stress, particularly when cash flows are constrained or managerial resources are already stretched.

Greater transparency can create an additional penalty. Companies emerging from weak ESG practices may reveal governance shortcomings, environmental problems or social controversies that had previously received less scrutiny. Markets can react to those disclosures immediately, even when the underlying problems are being corrected, creating an uncomfortable possibility for boards and investors: ESG progress and resilience can move in opposite directions for a period. A company may be undergoing genuine reform while simultaneously appearing more exposed and operating less efficiently.

The study challenges the idea that small ESG improvements necessarily produce small resilience gains. Partial implementation can leave firms in an expensive intermediate position, too committed to avoid the costs of transition, but not advanced enough to capture the benefits.

Productivity decides whether ESG becomes capability or overhead

The researchers trace part of the U-shaped pattern through total factor productivity, which measures how efficiently firms turn inputs such as labour and capital into output. ESG performance initially has a negative relationship with productivity, but the relationship turns positive at higher levels.

This mechanism gives the study more depth than a standard ESG-performance correlation. It implies that sustainability becomes economically consequential only when it changes the way a firm operates.

At lower levels of ESG development, new compliance demands and organizational adjustment can pull resources away from productive activity. At higher levels, stronger governance, better information flows, improved internal control and sustainability-linked innovation can begin to reduce inefficiency rather than create it.

Stakeholder relationships also become more valuable once ESG performance is sufficiently credible. Access to finance can improve, trust with suppliers and customers can deepen, and firms may find it easier to attract skilled workers or support innovation.

The decisive transition, therefore, is not from "bad ESG" to "good ESG." It is from ESG as an additional layer of obligation to ESG as part of the operating system of the firm. Companies can accumulate sustainability activity without improving underlying capability. A longer report, a stronger rating or a larger compliance budget may demonstrate effort, but none of those automatically produces resilience.

The study's productivity channel offers a harder test. ESG begins to justify itself strategically when it improves resource allocation, technological efficiency, innovation capacity and the firm's ability to continue functioning under pressure.

Market scrutiny can turn sustainability into a higher-stakes contest

Capital markets do not simply observe this transition; they alter it. The study finds that greater analyst and market attention changes the shape of the ESG-resilience relationship, shifting the turning point slightly higher and making the curve steeper. Under heavier scrutiny, firms may need to achieve stronger ESG performance before the resilience benefit emerges. Weak or cosmetic improvements become less convincing because investors, analysts and other market participants demand more evidence.

External attention can improve discipline, but it also introduces distortion. Companies under constant pressure to demonstrate ESG progress may prioritize visible actions over operationally valuable ones, allocating resources toward communication, disclosure and rating management. The authors connect this tension with the risk of symbolic ESG and greenwashing. A firm can become highly active in communicating sustainability while still failing to improve the internal systems that determine productivity and crisis response.

The result is a paradox. Market scrutiny can punish superficial ESG, yet the same scrutiny can push firms toward short-term signaling if management becomes too focused on external expectations.

The regional evidence makes the institutional dimension even clearer. The U-shaped relationship is statistically significant in eastern China, where markets, regulation and supporting institutions are more developed, but not in the central and western regions. Hence, ESG appears to generate different returns depending on the environment surrounding the firm. Stronger markets, better financing channels and more developed institutions make it easier to convert sustainability investment into operating advantage.

For developing economies, this is a crucial warning. Copying ESG standards from mature markets without comparable financing systems, regulatory capacity or business infrastructure may produce compliance burdens without equivalent resilience gains.

The policy debate should move from ESG scores to conversion capacity

The study raises a more demanding policy question than whether firms should improve ESG performance. The issue is whether companies possess the capacity to convert ESG spending into productive capability.

Uniform targets can obscure that difference. A well-capitalized company with strong management and access to finance may absorb transition costs and move quickly toward the productive side of the curve. A smaller or financially constrained company may remain stuck in the expensive middle.

Policy design needs to pay closer attention to firm capability and institutional support. Green technology, digital transformation, human-capital development, stronger internal control and more efficient supply chains are more likely to produce durable gains than sustainability activity designed primarily to satisfy disclosure requirements.

Investors face a similar problem. A rising ESG score does not reveal whether a company is still paying the cost of transition or has already begun converting sustainability investment into productivity. Two firms with similar ratings may therefore have very different resilience profiles.

The study's limits are equally important. Its findings come from listed Chinese companies, so the estimated turning point cannot be exported as a universal benchmark. Its main resilience measure is based on stock-price volatility, which captures market perceptions as well as operating conditions, although the authors use alternative measures and several robustness tests.

Questions remain about privately held firms, smaller enterprises and companies in economies with thinner capital markets. Their transition costs may be larger, their financing options narrower and their ability to absorb temporary efficiency losses weaker.