Striving for sustainable development: Green financial policy, institutional investors, and corporate ESG performance

Environmental, social, and governance (ESG) practices play an increasingly important role in achieving sustainable development goals. Drawing on institutional theory, this paper empirically explores whether and how green financial policy affects corporate ESG performance. Taking China's pilot policy for green finance reform and innovation (GFP) as a quasi-natural experiment, we employ the difference-in-differences model to investigate the causal relationship between green financial policy and corporate ESG performance. We find that the GFP significantly improves corporate ESG performance. The results are robust to a series of checks such as parallel trend examination, placebo test, mitigation of omitted variable bias, alternative variables, and the exclusion of contemporaneous policies. The heterogeneity analysis shows that the positive impact of GFP on corporate ESG performance is more pronounced for firms with tighter financial constraints, higher agency costs, and more external pressures. On this basis, we further document that the positive impact of GFP on corporate ESG performance is more pronounced for investee firms with more institutional ownership. The above findings indicate that the formal institution of government-led green financial policy can positively affect corporate ESG performance, and market participants-institutional investors help to strengthen this policy effect. Overall, our study sheds light on the significant role of green financial policy in promoting corporate sustainability.

Automated summary

Drawing on institutional theory, this study empirically explores the impact of green financial policy on corporate ESG performance. The research finds that the policy significantly improves corporate ESG performance, especially for firms with tighter financial constraints, higher agency costs, and more external pressures. Furthermore, the participation of institutional investors helps strengthen the effectiveness of the policy.