The ESG investment paradox: Integrating internal risk control into a resource governance framework

Abstract

While strong environmental, social, and governance (ESG) performance improves capital access, manufacturing firms often face a "capital allocation paradox." Information asymmetry and agency problems can divert these resources toward greenwashing or unproductive over-investment rather than efficient projects. This study aims to address this paradox by developing a "Resource-Governance" conceptual framework that shifts the focus from capital acquisition to capital allocation. Grounded in agency theory and supplemented by enterprise risk management (ERM) and the resource-based view (RBV), this conceptual study explores the theoretical interplay between non-financial ESG signals and internal governance. Methodologically, the framework proposes evaluating investment inefficiency via Richardson’s (2006) residual model. The conceptual framework proposes that internal risk controls act as strategic "gatekeepers." The framework suggests that robust control mechanisms systematically embed risk-adjusted return calculations into capital budgeting, effectively blocking negative-NPV projects and curbing ESG-related agency costs. Furthermore, it highlights China’s ownership segmentation, specifically the heterogeneous budgetary constraints between state-owned and non-state-owned enterprises, as a critical institutional boundary condition for this governance mechanism's effectiveness. The true financial value of ESG resources cannot be unlocked automatically; it depends critically on the synergistic integration of green signaling and internal process discipline. This conceptual model offers actionable insights for promoting ethical governance, curbing greenwashing, and ensuring sustainable economic value.