Fostering firm productivity through green finance: Evidence from a quasi-natural experiment in China

This study investigated how green finance affects the total factor productivity (TFP) of firms in heavily polluting industries. In 2017, the People's Bank of China (PBC) issued a policy of incorporating green finance into its macroprudential assessment system. Applying this event as a quasi-natural experiment to identify causality, we used a difference-in-differences approach to show that the PBC's green finance policy can improve the TFP of firms in heavily polluting industries, thus confirming the Porter hypothesis of environmental regulations. While exploring mechanisms, we showed that the PBC's policy can tighten credit to firms in such industries, forcing them to engage in green innovation and reduce their agency costs, thereby improving their TFP. In addition, the PBC's green finance policy mainly promotes TFP in large-scale and nonzombie firms in heavily polluting industries and in firms in regions with weak bank competition. • We investigate how PBC's green finance policy affects TFP of heavily polluting firms. • It shows that PBC's green finance policy improves firms' TFP using DID. • It increases green innovation and reduces agency costs by tightening credit. • The effect occurs in large and nonzombie firms and weak-bank-competition areas.