Green finance reforms and environmental protection: Evaluating the impact of GFRIs on polluting firms in China

Environmental degradation arising from rapid industrialization poses a critical challenge to sustainable development, necessitating effective financial instruments to promote corporate ecological responsibility. This study examines whether China’s 2017 Green Finance Reform and Innovation (GFRI) pilot zones effectively stimulated environmental protection investment among heavily polluting firms. Utilizing a difference-in-differences-in-differences (DDD) framework as a quasi-natural experiment, the analysis draws on panel data from 3,210 Chinese A-share listed companies spanning 2012–2021, yielding 21,621 firm-year observations. The empirical findings reveal that GFRI pilot zones significantly increased environmental investment by heavily polluting enterprises, and a formal joint pre-trend test confirms the parallel-trends assumption underlying the identification strategy. These results remain robust across multiple sensitivity analyses, including propensity score matching with difference-in-differences (PSM-DID), temporal and geographic placebo tests, alternative variable measurements, and competing policy controls; the Callaway and Sant’Anna (2021) heterogeneity-robust estimator yields an average treatment effect on the treated of 0.0371, closely consistent with the baseline, and a dose-response specification confirms that the treatment effect scales monotonically with city-level green bond issuance intensity, together providing strong confirmatory evidence of a genuine causal relationship. Mechanism analysis, grounded in environmental legitimacy theory and the Porter Hypothesis, demonstrates that GFRIs promote environmental investment through two theoretically predicted channels, reducing debt-financing costs and alleviating financial constraints, which together account for approximately 32.9% of the total policy effect. Heterogeneity analysis reveals that policy effects are concentrated among firms with superior ESG management quality, larger enterprises, and non-state-owned firms; a falsifiable interaction test establishes environmental disclosure credibility, specifically the presence of third-party assurance on corporate CSR reports, as the operative firm-level boundary condition through which ESG quality amplifies the policy effect, with assured firms responding at more than double the rate of non-assured counterparts. These findings offer actionable policy insights for designing targeted green finance instruments that channel private capital toward corporate environmental governance in developing economies, while highlighting that the transferability of the GFRI model depends on the concurrent development of environmental disclosure infrastructure, regulatory enforcement capacity, and complementary institutional architecture. • GFRI pilot zones significantly boost environmental investment by polluting firms. • DDD framework isolates targeted policy effects on heavily polluting enterprises. • Green finance reduces debt financing costs and alleviates financial constraints. • Policy effects are stronger for firms with superior ESG management quality. • Environmental legitimacy theory explains voluntary corporate green investment.