Managing financing costs and fostering green transition: The role of green financial policy in China

In compliance with emerging environmental imperatives, promoting sustainable development is long overdue and pivotal in today's world. Financial policy works closely within this global discourse, but information on how it works at the micro level to achieve a green transition is still limited. Based on the environmental, social, and governance framework, we characterize the central bank eligible collateral framework as a quasi-natural experiment to determine the effect of green financial policy on firms' bond financing costs and long-term green transition. The findings reveal a significant decline in the bond spread for green bonds and an increase in brown bonds, demonstrating the existence of the green premium. This relationship becomes pronounced when we explore the moderating effect of firms' operational volatility and the scale of their long-term loans. We also find substantial heterogeneity in policy impacts stemming from variations in firms' green innovation activities. Our findings thus provide insights into the role of a sound green policy in achieving green transition and sustainable growth.