["Business Strategy and the Environment, EarlyView. ", "\nABSTRACT\nSustainability transitions in capital‐intensive manufacturing depend on governance that aligns productivity with environmental, social, and governance (ESG) demands. We investigate whether ESG shortfalls serve as internal productivity constraints in the Taiwanese semiconductor manufacturing context. We apply an input‐oriented data envelopment analysis (DEA)–Malmquist productivity index (MPI) framework to 21 listed firms (2018–2022), operationalizing ESG shortfall as the complement of the Taiwan Economic Journal (TEJ) ESG rating (TESG), defined as 100 − TESG, and incorporating it as an undesirable factor to be minimized. The mean aggregate efficiency is 0.750, and the 5‐year geometric mean MPI is 0.974 (an annual decline of approximately 2.6%). The contraction is driven mainly by technological change (0.983) and scale‐efficiency change (0.981) despite an improvement in pure technical efficiency (1.011). These results contribute to the field by providing an ESG‐internalized DEA–MPI diagnosis of sustainability‐related productivity frictions and identifying governance‐embedded capability building as central to transition readiness under disruption.\n"]