Balancing Sustainability and Profitability: The Financial Effect of Green Innovation in Chinese High-Pollution Industries

Fatima Batool, Ibrahim A. Alhidary (), Jhansi Rani Boda, Belal Mahmoud Alwadi, Khurshid Khudoykulov and Mohammad Haseeb ()
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Fatima Batool: School of Finance, Central University of Finance and Economics, Beijing 102206, China
Ibrahim A. Alhidary: Department of Animal Production, College of Food and Agriculture, King Saud University, Riyad 12372, Saudi Arabia
Jhansi Rani Boda: School of Business, GITAM University, Hyderabad 502329, Telangana, India
Belal Mahmoud Alwadi: Department of Basic Sciences, Al-Zaytoonah University of Jordan, Queen Alia Airport Street, Amman 11733, Jordan
Khurshid Khudoykulov: Department of Finance and Tourism, Termez University of Economics and Service, Termez 190111, Uzbekistan
Mohammad Haseeb: Institute of Regional Economics Research, School of Economics and Management, Wuhan University, Wuhan 430072, China

Sustainability, 2025, vol. 17, issue 8, 1-29

Abstract: Green innovation plays a crucial role in sustainable development, yet its financial impact on high-pollution industries remains underexplored. This study analyzes the short- and long-term financial effects of green innovation using 30,108 firm-year observations from Chinese A-share listed companies in high-pollution industries (2009–2022). Employing fixed-effects regression models, green innovation is measured through environmental patents (EnvrPats) and environmentally innovative patents (EnvrInvPats), with Return on Assets (ROA) as the financial performance metric. To address endogeneity concerns, instrumental variable (IV) techniques are applied using digital transformation (DT) as an instrument, alongside a two-stage Generalized Method of Moments (GMM) approach for validation. This study explores the moderating roles of Sustainable Liquidity Reserves (cash flow) and the Sustainable Development Index (ESG performance), while a channel test examines the influence of R&D expenditures and financial constraints. A heterogeneity analysis reveals that firms in high-pollution industries experience greater short-term financial benefits from green innovation, driven by regulatory pressures and public scrutiny. A pre- and post-COVID-19 analysis highlights the increased importance of green innovation in firm resilience during economic disruptions. Robustness checks, including alternative financial performance measures and nonlinear modeling, confirm the reliability of the findings. While green innovation imposes initial financial costs, firms with stronger cash reserves and ESG performance can better absorb these costs and achieve long-term financial gains, emphasizing the need for targeted policy support to facilitate sustainable growth.

Keywords: green innovation; financial performance; high-pollution industries; sustainable liquidity reserves; sustainable development index; regulatory compliance (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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