Abstract
This study investigates the complex transmission mechanism between ESG ratings, carbon performance, and financial outcomes in China's manufacturing sector. Using balanced panel data from 1,550 Chinese A-share manufacturing companies (2018-2024, N=10,850) and two-step System GMM methodology to address endogeneity concerns, we identify two critical findings. First, ESG ratings exert robust positive direct effects on financial performance (ROA/ROE), confirming their signaling and resource acquisition functions. Second, carbon performance functions as an "inhibitory mediator", while ESG investments significantly enhance carbon performance (reducing carbon intensity), the associated capital expenditures and operational adjustments substantially constrain short-term financial returns, creating a "value masking effect". This phenomenon reveals heightened financial frictions where liquidity constraints amplify decarbonization costs. The study quantifies the hidden costs of sustainability transitions and provides crucial implications for investors assessing transition risks and policymakers designing green incentive frameworks.