How environmental regulations affect the development of green finance: Recent evidence from polluting firms in China

Deviating from the environmental regulations at the regional level, this study focuses the research sample on Chinese A-share polluting companies and uses the ordinary least squares model and the seemingly unrelated regression model to test whether the existing corporate-level environmental regulations promote the development of green finance. The findings suggest that environmental regulations positively affect green finance through short-term or long-term external financing. This result is valid even after the robustness test of the change regression model and the measurement of the change key variables. Further heterogeneity analyses showed that the effect of environmental regulations is more significant in eastern China, manufacturing enterprises, and non-state-owned enterprises; conversely, environmental regulations are ineffective in central and western China and state-owned enterprises. The financing required to engage in polluting projects is binding; it cannot promote green finance. The impact of environmental regulations on green finance is weakened by the “greenwashing” situation, in which non-manufacturing enterprises are defrauding green fund providers. This study will help policymakers improve environmental regulations and establish a multi-party supervision and review mechanism for the green financial system.