Green Light or Green Burden: ESG’s Dual Effect on Financing Constraints in China’s Heavily Polluting Industries

Jingnan Wang, Yue Liu (), Boyan Zou () and Tonghai Ji
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Jingnan Wang: School of Finance and Economics, Jiangsu University, Zhenjiang 213013, China
Yue Liu: School of Finance and Economics, Jiangsu University, Zhenjiang 213013, China
Boyan Zou: Department of Economics, University of Toronto, Toronto, ON M5S 3G7, Canada
Tonghai Ji: School of Management, Jiangsu University, Zhenjiang 212013, China

Sustainability, 2025, vol. 17, issue 20, 1-30

Abstract: Using a firm-level panel of China’s heavily polluting industries from 2014 to 2023, this paper employs two-way fixed-effects regressions and a battery of robustness checks to examine how ESG performance affects corporate financing constraints and the channels through which effects operate. We uncover a paradox: overall ESG performance is associated with reduced financing constraints, whereas the environmental subcomponent alone significantly aggravates firms’ financing difficulties. Moderating analyses show that stricter regional environmental regulations and higher persistence in firms’ innovation outputs weaken the easing effect of aggregate ESG performance and may even fully offset it under certain conditions. Mechanism tests reveal that ESG mitigates constraints mainly by enhancing corporate reputation and curbing green agency costs. Heterogeneity analyses further indicate that the environmental-induced tightening effect is more pronounced in state-owned enterprises, firms in eastern provinces, and those located in regions with lower levels of new-quality productivity. These findings point to a trade-off between the short-term compliance costs of environmental investment and the longer-run signaling and informational benefits of ESG disclosure. Policy implications include the need for targeted green-finance support, improved ESG transparency and verification, and measures to accelerate innovation pathways that shorten the payback period for environmental investments.

Keywords: ESG performance; financing constraints; heavily polluting industries; environmental regulation; innovation output sustainability (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2025
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