Local green finance policies and corporate ESG performance

• Published date: 01 December 2023
• Author: Qihang Xue,Huimin Wang,Caiquan Bai
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/irfi.12417

ORIGINAL ARTICLE

Local green finance policies and corporate

ESG performance

Qihang Xue

1,2

| Huimin Wang

1,2

| Caiquan Bai

3

1

School of Economics, Shandong University,

Ji'nan, Shandong, People's Republic of China

2

Zhongtai Securities Institute for Financial

Studies, Shandong University, Ji'nan,

Shandong, People's Republic of China

3

The Center for Economic Research,

Shandong University, Ji'nan, Shandong,

People's Republic of China

Correspondence

Caiquan Bai, The Center for Economic

Research, Shandong University, 27 Shanda

Nanlu, Ji'nan, Shandong 250100, People's

Republic of China.

Email: baicaiquan@sdu.edu.cn

Funding information

the National Natural Science Foundation of

China, Grant/Award Number: 72204142; the

Natural Science Foundation of Shandong

Province, Grant/Award Number:

ZR2021QG062; the General Project of China

Postdoctoral Science Foundation,

Grant/Award Number: 2022M711907; the

Postdoctoral Innovation Project of Shandong

Province, Grant/Award Number:

12120071310205

Abstract

Based on China's government-business relations theory, we

use difference-in-differences and causal forest to find that

local green finance policies can significantly enhance corpo-

rate ESG performance especially for nonstate-owned com-

panies, companies with high levels of executive social

capital, non-heavily polluting companies, and companies in

developed regions. We also find that the corporate financ-

ing constraint mitigation effect and the regional environ-

mental regulation effect of local green finance policies are

important mechanisms for promoting corporate ESG perfor-

mance. Additionally, local green finance policies can

strengthen the positive role of corporate ESG performance

in enhancing corporate value, which is conducive to corpo-

rate sustainability.

KEYWORDS

causal forest, corporate ESG performance, difference-in-

differences, government-business relations, local green finance

policies

1|INTRODUCTION

Global warming and environmental degradation caused by human activities have had a serious negative impact on

the sustainable development of the economy and society (Jia & Li, 2020). In this regard, countries worldwide have

promoted concepts such as green and sustainable development to an unprecedented height, and improving corpo-

rate environmental (E), social (S), and governance (G) performance is the most important such promotion (Lioui &

Qihang Xue and Huimin Wang contributed equally to this work.

Received: 5 August 2022 Revised: 6 December 2022 Accepted: 3 May 2023

DOI: 10.1111/irfi.12417

© 2023 International Review of Finance Ltd.

International Review of Finance. 2023;23:721–749. wileyonlinelibrary.com/journal/irfi 721

Tarelli, 2022). ESG represents a comprehensive assessment of a company's performance in environmental protec-

tion, social responsibility, and corporate governance, reflecting a greener development approach, more responsible

corporate image, and more effective governance mechanism (Gillan et al., 2021; Tang et al., 2022). Under the ESG

concept, investors may consider more nonfinancial factors when screening investments, including environmental

governance performance and green development policies, to encourage companies to take on more social responsi-

bilities (Arora et al., 2022). Moreover, as the number of companies evaluated by the ESG system increases, compa-

nies pay substantial attention to environmental protection practices, which can improve local ecological quality

(Cortez et al., 2022). Therefore, a company's ESG performance can not only reflect its strong sense of social respon-

sibility, which is conducive to not only attracting more investments and improving corporate performance but also

improving regional environmental quality, further achieving the “double dividend”of economic growth and environ-

mental protection.

As the concept of green and sustainable development has gradually received global consensus, green finance

has emerged at this historic moment. Green finance refers to economic activities that support environmental

improvements, combat climate change, and promote the efficient use of resources. Green finance can provide finan-

cial support for energy-saving and environmentally friendly technologies or projects (Madaleno et al., 2022). As the

world's largest primary energy consumer and carbon dioxide emitter (Lee & Lee, 2022), China attaches great impor-

tance to the development of green finance. In August 2016, China's central government issued the “Guidance on

Building a Green Financial System,”which formed a relatively comprehensive top-level design for green finance.

Subsequently, various regions in China have issued their own green finance policies to establish a system. Notably,

local governments in China seem more motivated to issue and promote green finance policies in their region. Several

local governments had already started to deploy their own green finance policy systems before the central govern-

ment issued a national policy document (e.g., Dalian, Qingdao).

In fact, the main reason for local governments to actively launch green finance policies is China's vertical political

management system and political decentralization model. The system uses performance appraisals as the primary

basis for promoting local cadres (Wang & Shailer, 2022); consequently, local governments become part of a “political

tournament”with development performance as the core (Li & Zhou, 2005). At the same time, in recent years, the

central government has gradually strengthened the evaluation of local officials' environmental protection perfor-

mance. Environmental performance has become increasingly important in officials' comprehensive performance eval-

uations, which has promoted local cadres to pay greater attention to environmental governance (Liu, Tan, &

Zhang, 2021), and the “green finance development tournament”among local governments has also intensified. Fur-

thermore, regional development performance is closely related to the performance of local companies. Therefore,

local governments may allow flexibility based on meeting the central government's requirements of providing neces-

sary public services and administrative protection for locally advantageous companies or industries. Bai et al. (2020)

call it “special deals”with Chinese characteristics. Thereafter, given such a tournament system with Chinese charac-

teristics and local government-business relationships, can local green finance policies enhance corporate ESG perfor-

mance? What is the underlying mechanism of this phenomenon? Exploring the actual impact of local green finance

policies on corporate ESG performance is not only conducive to an in-depth evaluation of the microeffects of green

finance policy but also provides evidence for studying government-business cooperation given the green finance

development tournament.

According to the question, two parts of the literature are closely related to this study. The first examines the

microscopic effects of green finance. Flammer (2021) uses 1189 companies from China, the United States, France,

Sweden, and other countries as a research sample and finds that issuing green bonds can attract investors who value

environmental protection and sustainable development and make companies pay greater attention to improving their

environmental performance. Liu and Xiong (2022) believe that green finance is conducive to motivating companies

to place green management in a strategic position and promote their operations in a more environmentally friendly

manner. There are also findings using the “Green Credit Guidelines”issued in 2012 to construct quasi-natural experi-

ments, such as realizing the Pareto improvement in financial resource allocation (Lee & Lee, 2022), promoting

722 XUE ET AL.