In the midst of the ongoing digital revolution, firms are increasingly embracing the artificial intelligence (AI) to optimize their operations. This study aims to explore the role of AI adoption in firm environmental, social, and governance (ESG) performance. By analyzing 23,094 firm-year observations of Chinese A-share listed firms from 2009 to 2021, the primary findings reveal that AI significantly improves firm ESG performance. This highlights the importance of technological advancements in driving environmental efficiency and promoting sustainable practices. Furthermore, the impact is more pronounced in non-state-owned enterprises, compared to state-owned enterprises (SOEs), and in central SOEs than local SOEs. Additionally, the mechanism analysis indicates that AI helps firms alleviate financing constraints, enhance internal control, and improve overall firm performance, leading to enhanced ESG performance over time. Moreover, the impact is more pronounced in regions with high fintech activity, strict environmental regulations, and high bank concentration. These findings highlight the substantial role of China's government in advancing the digital economy and broader ESG initiatives. The results remain robust and valid across different statistical methods, including PSM, sys-GMM, and 2SLS.
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