The unique characteristics of Environmental, Social, and Governance (ESG) in the construction industry and its impact mechanisms within a complex environment still need to be further explored. This study employs grounded theory and a system dynamics model to construct a system of ESG, innovation, and the competitive advantage in construction enterprises. Through simulation analysis, this study elucidates the dynamic relationships, causal links, and evolutionary patterns among system elements. The results indicate that (1) ESG, innovation, and the competitive advantage exhibit oscillatory convergence patterns, with innovation and competitive advantage exhibiting time-lagged responses; (2) improvements in environmental (E), social (S), and governance (G) awareness generate diminishing marginal effects on corresponding performance metrics, while reductions in S awareness lead to more pronounced performance deterioration; and (3) simultaneous strengthening of E, S, and G awareness substantially elevates peak levels of innovation and competitive advantage while accelerating their attainment. This study systematically analyzes the dynamic and complex mechanisms through which ESG influences construction enterprises’ competitive advantage and provides valuable suggestions for the sustainable development of construction enterprises.

Purpose: Previous studies have focused on the financial effects of environmental, social and governance (ESG) practices but have overlooked non-financial aspects. This study aims to address this gap for the construction industry, with its resource and labour dependence, diverse stakeholders and complex governance. It examines ESG effects on Chinese construction enterprises' competitive advantage (CA) from financial and non-financial perspectives and explores innovation's mediating role under environmental uncertainty (EU). Design/methodology/approach: Through structural equation modelling and regression analysis, this study examines ESG effects on CA and their mediators. Data are collected through a survey of Chinese construction enterprises. Findings: (1) The environmental dimension and governance dimension enhance CA, whereas the social dimension has no significant effect. (2) Enterprise innovation mediates this relationship, with business model innovation (BI) and technological innovation (TI) playing distinct roles. (3) EU negatively moderates innovation's effect on CA. Originality/value: This study expands the theoretical framework by integrating non-financial aspects into ESG's effect on CA. The findings offer insights into how ESG fosters CA through innovation, with distinct roles for the ESG dimensions and emphasise the need for adaptive innovation strategies in uncertain environments.