Green innovation under multiple pressures: examining financial constraints, ESG performance, and environmental regulations

This study investigates the role of environmental, social, and governance (ESG) performance in reshaping the relationship between financial constraints and green innovation among Chinese listed firms from 2010 to 2023. We examine the double-edged sword hypothesis that financial constraints affect innovation differently depending on firms' ESG performance. Our baseline results confirm that financial constraints significantly reduce green innovation. However, we find a significant positive interaction of ESG and financial constraints on green innovation, indicating that ESG performance weakens or offsets the negative impact of financial constraints on green innovation. Furthermore, environmental regulations amplify this moderation effect through a positive triple interaction, suggesting that regulatory pressure strengthens ESG's role in transforming constraints into innovation drivers. Moreover, the positive interaction between ESG and financial constraints is stronger in state-owned enterprises and high-polluting industries. These findings suggest that ESG performance can transform financial constraints from barriers into innovation drivers. We recommend that policymakers prioritize strengthening firms' sustainability capabilities through targeted financial and regulatory instruments, rather than implementing uniform policies or regulatory frameworks without considering the firms' ESG capabilities.