In recent years, the issue of environment, social responsibility and governance (ESG, hereafter) and the green transition of enterprises have been the hottest topics around the world. The Report of the 19th National Congress of the Communist Party of China pointed out that Chinese economy had shifted from the stage of high-speed growth to the stage of high-quality development. Nowadays, it is critical for Chinese economy to transform to the new development mode, optimize the economic structure, and find the new economic growth driver. Thus, adhering to the concept of ecological civilization and improving the ESG performance of various economic entities are of vital importance to the sustainable development of Chinese economy. Economy, society and environment are not only the three pillars of sustainable development, but also the methods and paths to achieve sustainable development.

Taking the implementation of the Environmental Protection Tax Law of the People’s Republic of China as a quasi-natural experiment, this paper examines the impact of the greening of tax system on the ESG performance of heavy pollution enterprises (HPEs, hereafter). It is found that: (1) After the promulgation of the Environmental Protection Tax Law, the ESG performance of HPEs has been significantly improved. That is, the greening of tax system has improved the ESG performance of HPEs. (2) For enterprises with lower Tobin’s Q, higher financial leverage, more attention from analysts, and higher shareholding ratio of institutional investors, or located in regions with lower fiscal revenue or higher proportion of secondary industry, the impact of the greening of tax system on ESG performance is pronounced. (3) The impact of the greening of tax system on ESG performance is achieved by encouraging HPEs to increase investment in environmental protection and improve the level of green innovation. (4) The greening of tax system has a spillover effect, which significantly improves the performance of corporate social responsibility and promotes the construction of corporate green governance system.

The contributions of this paper are as follows: First, from the perspective of sustainable development, it discusses the policy effect of the Environmental Protection Tax Law for the first time. The results show that the greening of tax system can encourage enterprises to carry out environmental governance from the front end and source, and there is a spillover effect. Second, it enriches the relevant literature on the influencing factors of ESG. Third, it analyzes and verifies the impact mechanism and action mechanism of the Environmental Protection Tax Law on the ESG performance of HPEs, which provides us with micro-level empirical evidence to understand how environmental regulation plays a role in sustainable development.