Green finance and environmental, social, and governance performance

Firms' involvement in environmental, social, and corporate governance (ESG) initiatives is a key determinant of their sustainable development efforts. Using the setting of China's Green Financial System Guidelines and adopting a difference-in-differences design, we examine the effect of the green finance policy on ESG performance. We find that the adoption of the policy improves the ESG performance of heavily polluting enterprises. Channel analysis shows that the green finance policy aggravates the financing constraints of such enterprises. Further, the positive effect of green finance policy on ESG performance is more pronounced for firms with better internal and external governance.