How does the green financial system affect environmentally friendly firms' ESG? Evidence from Chinese stock markets

In 2016, the Chinese authorities publicized the Guidance on Building a Green Financial System (GBGFS), which sought to guide social investment toward green industries and advance sustainable economic development. To examine whether this policy has achieved its intended effect, our study utilizes the difference-in-differences approach to investigate the influence of the GBGFS on micro level sustainable development, i.e., firms' environmental, social, and governance (ESG), and employ panel data of A-share listed firms from 2011 to 2022 as the research sample. Benchmark regression and a series of robustness tests demonstrate that the GBGFS significantly promotes firms' ESG, although a two-year lag in the policy effect is evident. We also conduct a range of additional tests to investigate the policy effect in different circumstances, finding that a) the GBGFS has positive effects on environmental and social, while it has an insignificant effect on governance; b) quantile analysis reveals that the GBGFS generates about twice the boost for firms with high degrees of ESG than those with low levels; c) our threshold regression demonstrates that the policy's promotional effect doubles, when research and development (R&D) investment exceeds the threshold value, providing new empirical validation for the Porter hypothesis; and d) the GBGFS has a stronger effect on firms with political connections than those without such connections. Nonstate-owned enterprises can establish political connections by hiring government officials to obtain more government support and improve ESG. In addition, the GBGFS has the strongest effect on firms in the western region followed by the eastern region, with an insignificant effect in the central region. The central government can appropriately adjust the GBGFS and encourage firms on R&D investments, so as to make the policy effect longer, more precise, stronger and wider, and finally achieve sustainable development goals.