Does Green Finance Drive Environmental Innovation in China?

ABSTRACT

The importance of green finance has been fully discussed, however, there is surprisingly little direct evidence of the effects of green finance on eco-friendly practices in firms. We explore the effect of green finance on environmental innovation at the firm level using unbalanced data on Chinese A-share listed firms excluding financial firms during 2008–2019. We find compelling evidence of a significant positive effect of green finance on firm environmental innovation. An examination of underlying mechanisms further show that green finance can be effective in by easing the financing constraints, alleviating information asymmetric, and strengthening environmental regulation. Our analyses also show that the effect is particularly pronounced in subsamples of central and western China, non-state-owned enterprises (non-SOEs), and large-sized firms. This paper proves the Porter effect of green finance and provides timely implications for regulators concerned with green development.

KEYWORDS:

• Environmental innovation
• green finance
• financial constraints
• environmental regulation
• Google News

JEL:

• G18
• O31
• O33

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Supplementary Material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/1540496X.2023.2190847

Notes

1. In August 2016, the People’s Bank of China and six other ministries issued the “Guidance on Building a Green Financial System.” The document begins with a clear definition of green finance in China and the construction of the system. Website: http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/3131687/index.html.

2. This document explicitly requires banks to favor the issuance of loans to enterprises that meet environmental requirements, to control credit to enterprises and projects that do not comply with industrial policies and environmental violations, and for commercial banks to make the environmental compliance of enterprises one of the necessary conditions for approving loans. In addition, this document provides that environmental protection departments at all levels to inform financial institutions of the environmental information of enterprises, while financial institutions to inform the situation based on environmental protection, strict loan approval, issuance and supervision, and management of new projects that have not passed the environmental assessment and approval or acceptance of environmental protection facilities, financial institutions shall not add any form of credit support. Furthermore, the document also provides that for the environmental protection departments at all levels to investigate and deal with excessive emissions, unlicensed emissions, or failure to complete the treatment of completed projects, financial institutions in the review of its corporate working capital loan applications, should strictly control the loan.

3. The data comes from a speech by the governor of the People’s Bank of China at the roundtable meeting of the China Development High-level Forum in 2021. https://m.thepaper.cn/baijiahao_11810921.

4. https://www.cnipa.gov.cn.

5. The United Nations Framework Convention on Climate Change (UNFCCC) lists the IPC Green Inventory including seven categories: alternative energy production, transportation, energy conservation, waste management, agriculture or forestry, administrative regulatory or design aspects, nuclear power generation.

6. The keywords related to green finance are listed separately in Appendix 2.

7. Ask the author for the crawling process source code if necessary.

8. The formula of SA index is derived from Hadlock and Pierce (2010): SA = - 0.737 × Size + 0.043 × Size × Size - 0.04 × Age.

Additional information

Funding

The Jilin Provincial Science and Technology Department Innovation Development Strategy Research Project [20230601033FG].