Jinfang TIAN, Siyang SUN, Wei CAO, Di BUE, and Rui XUE investigated the impact of public environmental regulation on the allocation of green credit to promote a shift towards a more sustainable economy. Under green credit banks also use project-related environmental information as an evaluation criterion for credit worthiness of the project along with conventional financial metrics. The researchers focused on heavily polluting firms in China’s industrial sector from 2009 to 2014, a period during which there were relatively standardized practices for disclosing pollutant emissions from industrial activities. They also considered the introduction of the “Green Credit Guidelines” in 2012, which served as a quasi-natural experiment for examining the relationship between green credit regulation and firms’ green investment.
The study discovered that heavily polluting firms were using green credit to improve their reputation through short-term, inefficient investments. Furthermore, the implementation of credit regulation led to a distortion in the behavior of these firms, discouraging them from pursuing incremental innovation. This was evidenced by a significant increase in utility model patents compared to the stability of invention patents. The latter is crucial for driving advances in green technologies and long-term sustainable growth, highlighting the unintended consequences of the regulation. To counteract this “greenwashing” effect, the researchers suggest that the government should impose stricter penalties and elevate the legitimacy requirements for green credit. Tailored monitoring could also be employed to encourage voluntary corporate social responsibility.
The study also explores the future value of green investment which has often been left behind in previous research. It was found that green investment in textile, clothing, and apparel manufacturing holds relatively high future value. This is attributed to the integration of sustainable practices in the supply chain and increasing consumer concerns for the environment. Conversely, the value of green investments in heavily polluting industrial firms is relatively low due to the inherently harmful nature of their growth model. As a result, the researchers recommend that policymakers consider separating these two types of firms when formulating green credit regulations. Labor-intensive companies should focus on developing eco-friendly products and innovative green technologies to enhance their competitiveness, while capital-intensive firms should strive to adhere to strict environmental regulations and formulate sustainable strategies for green development.
