As global climate policies grow stronger, it has become increasingly important to understand how environmental regulations influence corporate behaviour. Green finance policies, which aim to steer capital toward sustainable activities, are a key part of this transformation. Yet their effect on the social and behavioural side of corporate decision-making remains unclear. This study explores how highly polluting (“brown”) firms in China react to peer influence in adopting environmental, social, and governance (ESG) practices after the introduction of the country’s landmark Green Credit Guidelines in 2012.
Using data from A-share listed firms between 2009 and 2022, the research treats the 2012 Green Credit Guidelines as a natural experiment within a difference-in-differences framework. It develops a peer ESG normative objective model under the Local Interaction Model, examining how firms respond to green finance shocks and how equilibrium outcomes emerge under different peer preferences. This approach combines econometric analysis with behavioural modelling to understand how companies adjust ESG strategies not only in response to regulation but also by observing their peers.
The results show that green credit policies significantly strengthen ESG peer effects among polluting firms, encouraging them to align more closely in sustainability practices. However, this convergence is not uniform. Firms react differently depending on their competitive and regulatory environments. Those facing stricter oversight or higher market pressure tend to follow peer behaviour more closely, while others remain less responsive. This highlights the importance of social context in shaping the impact of policy.
The study contributes theoretically by modelling peer effects in ESG adoption and identifying the conditions under which firms reach equilibrium in response to policy changes. It demonstrates that social influence can amplify the effects of green finance, suggesting that corporate sustainability is not only an economic choice but also a social process.
Practically, the findings offer valuable insights for regulators, financial institutions, and investors. Policymakers can design green credit schemes that leverage peer dynamics to accelerate sustainability adoption. Banks and investors may use these dynamics to evaluate ESG risks more effectively, while managers in high-emission industries should monitor peer ESG progress as part of their strategic planning. Overall, the research shows that environmental policies can work more powerfully when they consider how firms learn from and influence one another.
More information: Jianfen Seng et al, The ESG peer effect of green finance on brown firms: based on convergent competition and imitation learning perspective, China Finance Review International. DOI: 10.1108/CFRI-03-2024-0143
Journal information: China Finance Review International Provided by Shanghai Jiao Tong University Journal Center