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In the context of green development in China, the circumstance in which Environmental, Social and Governance (ESG) ratings function has changed. As an important external governance mechanism of sustainable development, ESG ratings can also be a two-edged sword for the implementation of carbon emission reduction. This research examines the connection of ESG ratings and corporate carbon emission reduction in the context of green development. This present study postulates that the impact of ESG ratings on carbon emission reduction performance in the context of green development is inverted U-shaped.

To obtain empirical evidence for the hypotheses proposed, this study makes an empirical test based on the two-way fixed effects model. The data is taken from listed Chinese manufacturing firms between 2012 and 2021.

The study reveals that there is a significant inverted U-shape relationship between ESG ratings and carbon emission reduction performance in the context of green development. Managerial myopic behaviour plays a positive moderating role in the above relationship. In addition, it makes the inflection point of inverted U-shaped curve move to left. Heterogeneity analyses show that the above inverted U-shaped relationship is more significant for firms that don’t hire CEO with environmental protection background or big four accounting firms.

In the background of green development, this study helps to understand dual influence of ESG ratings on corporate carbon emission reduction deeply. It is beneficial to guide enterprises to utilize ESG ratings mechanism reasonably, thus enhancing the effectiveness of carbon emission reduction. This study provides decision-making reference for government to accelerate low-carbon transformation in microcosmic field.