This study examines how digital transformation (DT) affects environmental, social, and governance (ESG) performance and whether exploitative and explorative DT contribute differently under the UK's post- Task Force on Climate-related Financial Disclosures (TCFD) regime.
Grounded in Ambidexterity Theory and Dynamic Capability Theory (DCT), the study constructs firm-level DT and ESG measures from unstructured annual and sustainability disclosures using a Natural Language Processing (NLP)–Entropy framework. Panel data for Financial Times Stock Exchange (FTSE)-listed non-financial firms (2020–2024) are analysed using fixed-effects regressions with firm-clustered standard errors. Mediation tests evaluate CSR and total factor productivity (TFP) as capability-based mechanisms.
DT is positively associated with ESG performance. Both exploitative and explorative DT exhibit significant positive relationships with ESG, indicating that ambidextrous digitalisation supports sustainability improvements. Mediation via CSR and TFP is statistically weak, suggesting that the DT–ESG linkage is not transmitted through these proxies within the study horizon and may operate primarily through direct digital mechanisms.
The study focuses on FTSE non-financial firms and a five-year window, which may constrain generalisability and the detection of longer-run capability maturation. Future work should extend the time horizon, employ alternative capability measures, and apply stronger causal identification designs.
Firms can improve ESG outcomes by pursuing both exploitative and explorative digital initiatives, while policymakers can reinforce gains by strengthening disclosure quality and digital reporting infrastructures.
The study integrates digital ambidexterity and DCT, introduces an NLP–Entropy measurement approach for DT and ESG, and provides evidence from a disclosure-intensive UK setting.
