Green Finance Policy and ESG Performance: Evidence from Chinese Manufacturing Firms

While the literature has examined the key role of green finance policy on firms’ green innovation and environmental performance, little attention has been paid to firms’ environmental, social, and governance (ESG) performance, which is increasingly important to stakeholders. Exploiting heterogeneity in firms’ exposure to the green finance pilot zones policy in China in 2017 as a quasi-natural experiment, this paper employs the difference-in-differences model to explore the effect of green finance policy on firms’ ESG performance. Based on the data of listed manufacturing firms in China during 2013–2020, our results indicate that the green finance policy could promote firms’ ESG performance. Moreover, the overall positive effect is driven mainly by the environmental pillar. Utilizing subsample estimation and the triple differences method, we further find that the higher ESG performance is driven by firms with less financial constraints, firms in economically more developed pilot zones, and state-owned enterprises (SOEs). Mechanism analysis indicates that the pilot policy promotes firms’ ESG performance even if it worsens firms’ financial constraints. Our study contributes to the research on both the impacts of green finance policy and the relationship between financial constraints and ESG performance, as well as to the literature on ESG structure.