ESG ratings are closely linked to corporate resource allocation and overarching macroeconomic constituents. Nevertheless, there is a noticeable lack in the literature investigating the interconnected relationship between the growth of local government debt, corporate underinvestment, and ESG ratings. This study aims to investigate the impact of local government debt on corporate underinvestment and its subsequent effects on corporate ESG performance. To achieve this goal, this study utilizes special bond data from Chinese provinces spanning the period between 2015 and 2021. The findings suggest that as local government debt swells, it imposes financing constraints on local companies, leading to underinvestment, particularly for listed companies with a high proportion of fixed assets and non-state-owned enterprises. A key effect is a “crowding-out effect” in which local government debt absorbs resources that could otherwise be allocated to private corporations and non-investment sectors. […]