Green credit policy drives ESG convergence among polluting firms

Background and Motivation

As climate policies intensify globally, understanding how environmental regulations influence corporate behaviour has become crucial. While green finance policies aim to redirect capital toward sustainable activities, their impact on the social dynamics of corporate decision-making remains poorly understood. This research addresses this gap by examining how brown firms respond to peer pressure in ESG adoption following the implementation of China's landmark Green Credit Guidelines.

Methodology and Scope

The study analyses A-share listed companies from 2009 to 2022, utilising the 2012 Green Credit Guidelines as a natural experiment in a difference-in-differences framework. The research employs a novel peer ESG normative objective model under the Local Interaction Model framework, examining both the existence of Nash equilibrium under various peer preference parameters and the optimisation of peer ESG utility under green finance shocks.

Key Findings and Contributions

The research reveals that green credit policies significantly enhance the ESG peer effect among brown firms, creating stronger convergence in environmental, social and governance practices. However, this convergence demonstrates asymmetry under multilevel contextual references, suggesting that firms respond differently to peer pressure depending on their specific market and regulatory environments. The study makes theoretical contributions by formally modelling peer effects in ESG adoption and demonstrating equilibrium conditions under policy shocks.

Why It Matters

These findings challenge conventional views of regulatory compliance as purely cost-driven decisions, revealing instead the powerful role of social dynamics and peer influence in corporate environmental behaviour. Understanding these behavioural mechanisms is essential for designing more effective environmental policies that leverage social networks and competitive dynamics to accelerate sustainability transitions.

Practical Applications

• Regulators can design policies that explicitly harness peer effects to amplify environmental compliance.
• Financial institutions should recognise peer dynamics when assessing ESG risks in brown industry portfolios.
• Corporate managers in polluting industries should monitor peer ESG adoption as a strategic imperative.
• Investors can utilise peer effect analysis to predict which brown firms are likely to improve ESG performance

Discover high-quality academic insights in finance from this article published in China Finance Review International. Click the DOI below to read the full-text original!