Government-initiated environmental credit rating and corporate climate transition risk exposure

Purpose This study aims to evaluate the influence of China’s environmental credit rating policy on firms’ climate transition risk exposure. By treating this policy as an external factor, the authors investigate how government-initiated environmental credit ratings affect firms’ risk exposure concerning their adaptation to a low-carbon economy. This research seeks to understand if and how the ratings can facilitate corporate environmental responsibility and resilience against climate change. Design/methodology/approach Using the difference-in-differences method, the authors analyze data from Chinese firms subjected to environmental credit ratings. Using regression analysis, we assess changes in climate transition risk exposure following the introduction of ratings. Sensitivity tests ensure robustness of findings. The authors also conduct mechanism tests to explore underlying reasons for observed effects, focusing on bank loans, environmental investments and penalties. In addition, the authors consider moderating factors like regional financial development, firm ownership and analyst attention. Findings The results show that government-initiated environmental credit ratings effectively reduce firms’ climate transition risk exposure. High ratings lead to improved access to finance, increased environmental protection investment and fewer penalties, thus lowering risk exposure. This effect is more pronounced in less financially developed regions, among non-state-owned firms, and with significant analyst scrutiny. Practical implications This study reveals that China’s environmental credit rating policy effectively reduces firms’ climate transition risk exposure, especially benefiting non-state-owned firms and regions with underdeveloped financial sectors. Firms should proactively improve their environmental performance to gain better credit ratings. Enhanced ratings can lead to increased bank loans and investments in environmental protection, directly lowering operational risks associated with climate change. Analyst attention further amplifies these benefits, encouraging transparent corporate practices. Social implications This research underscores the role of government policy in promoting sustainable business practices. By incentivizing firms through environmental credit ratings, it fosters a culture of environmental responsibility. Improved ratings not only reduce climate transition risk exposure but also decrease environmental penalties, suggesting more conscientious environmental management. This shift can lead to broader societal benefits, including cleaner environments and public health improvements. The policy’s success in less financially developed areas highlights its potential for equitable development, ensuring that all regions can contribute positively to global climate action. Originality/value This study uniquely examines China’s environmental credit rating policy’s role in mitigating climate transition risk exposure. It contributes to literature by identifying policy mechanisms that enhance corporate environmental performance. The research underscores the value of external evaluations in driving sustainable business practices, particularly in contexts with varying levels of financial development and ownership structures.