IDEAS home Printed from https://ideas.repec.org/a/eee/ecanpo/v85y2025icp2126-2141.html

The differentiated effect of China's new environmental protection law on corporate ESG performance

Author

Listed:
  • Wei, Rongrong
  • Yu, Zhaopeng
  • Zhen, Deyun

Abstract

Environmental regulation is a crucial policy tool for governments to curb environmental pollution and manage environmental issues. It also significantly influences corporate Environmental, Social, and Governance(ESG) performance. This study, drawing on research data from Chinese A-share listed companies over the period 2011–2021, employs a difference-in-differences(DID) approach to thoroughly examine the differentiated impacts of China's "strictest ever" New Environmental Protection Law (NEPL) on corporate ESG performance, as well as the underlying mechanisms of these impacts. The results show that the NEPL has notably enhanced the overall ESG performance of heavy polluting enterprises, and the conclusion remains valid even after a series of robustness tests, including identification assumption tests and Double/Debiased Machine Learning(DML) method. The ESG improvement effect of the NEPL exhibits heterogeneity in internal characteristics (such as digital transformation and R&D investment) and external attention (including analyst attention and institutional investor holdings). Further mechanism analysis reveals that the improvement in ESG performance of heavy polluting enterprises, attributed to the NEPL, is primarily driven by enhanced environmental protection (E) resulting from an increase in executive green cognition. However, the NEPL also triggers strategic green innovations and financing constraints, which paradoxically have adverse effects on the fulfillment of corporate social responsibility(S) and the enhancement of corporate governance (G). This paper offers empirical evidence at the micro-level to understand how environmental regulations affect corporate sustainability.

Suggested Citation

  • Wei, Rongrong & Yu, Zhaopeng & Zhen, Deyun, 2025. "The differentiated effect of China's new environmental protection law on corporate ESG performance," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 2126-2141.
    • Handle: RePEc:eee:ecanpo:v:85:y:2025:i:c:p:2126-2141
    DOI: 10.1016/j.eap.2025.02.035
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0313592625000633
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eap.2025.02.035?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Chen, Tao & Dong, Hui & Lin, Chen, 2020. "Institutional shareholders and corporate social responsibility," Journal of Financial Economics, Elsevier, vol. 135(2), pages 483-504.
    2. Tan, Yafei & Zhu, Zhaohui, 2022. "The effect of ESG rating events on corporate green innovation in China: The mediating role of financial constraints and managers' environmental awareness," Technology in Society, Elsevier, vol. 68(C).
    3. He, Yu & Zhao, Xiaoling & Zheng, Huan, 2023. "How does the environmental protection tax law affect firm ESG? Evidence from the Chinese stock markets," Energy Economics, Elsevier, vol. 127(PA).
    4. Liao, Zhongju & Chen, Jie & Weng, Chen & Zhu, Cunbin, 2023. "The effects of external supervision on firm-level environmental innovation in China: Are they substantive or strategic?," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 267-277.
    5. Shiyu Lu & Bo Cheng, 2023. "Does environmental regulation affect firms' ESG performance? Evidence from China," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(4), pages 2004-2009, June.
    6. Fang, Zhenming & Kong, Xiaoran & Sensoy, Ahmet & Cui, Xin & Cheng, Feiyang, 2021. "Government’s awareness of Environmental protection and corporate green innovation: A natural experiment from the new environmental protection law in China," Economic Analysis and Policy, Elsevier, vol. 70(C), pages 294-312.
    7. Wang, Juxian & Ma, Mengdi & Dong, Tianyi & Zhang, Zheyuan, 2023. "Do ESG ratings promote corporate green innovation? A quasi-natural experiment based on SynTao Green Finance's ESG ratings," International Review of Financial Analysis, Elsevier, vol. 87(C).
    8. Liu, Xing & Liu, Fengzhong, 2022. "Environmental regulation and corporate financial asset allocation: A natural experiment from the new environmental protection law in China," Finance Research Letters, Elsevier, vol. 47(PA).
    9. Yang Yang & Jinmian Han, 2023. "Digital transformation, financing constraints, and corporate environmental, social, and governance performance," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(6), pages 3189-3202, November.
    10. Zhen Chen & Ce Jia, 2023. "How does environmental regulation affect industrial green productivity of China's cities," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(9), pages 10143-10169, September.
    11. He, Yu & Zhu, Xiaobo & Zheng, Huan, 2022. "The influence of environmental protection tax law on total factor productivity: Evidence from listed firms in China," Energy Economics, Elsevier, vol. 113(C).
    12. Sofik Handoyo & Syaiful Anas, 2024. "The effect of environmental, social, and governance (ESG) on firm performance: the moderating role of country regulatory quality and government effectiveness in ASEAN," Cogent Business & Management, Taylor & Francis Journals, vol. 11(1), pages 2371071-237, December.
    13. Liao, Tianlong & Liu, Guanchun & Liu, Yuanyuan & Lu, Rui, 2023. "Environmental regulation and corporate employment revisited: New quasi-natural experimental evidence from China's new environmental protection law," Energy Economics, Elsevier, vol. 124(C).
    14. Dyck, Alexander & Lins, Karl V. & Roth, Lukas & Wagner, Hannes F., 2019. "Do institutional investors drive corporate social responsibility? International evidence," Journal of Financial Economics, Elsevier, vol. 131(3), pages 693-714.
    15. Anis Maaloul & Daniel Zéghal & Walid Ben Amar & Sari Mansour, 2023. "The Effect of Environmental, Social, and Governance (ESG) Performance and Disclosure on Cost of Debt: The Mediating Effect of Corporate Reputation," Corporate Reputation Review, Palgrave Macmillan, vol. 26(1), pages 1-18, February.
    16. Xie, Linlin & Zuo, Shiyue & Xie, Ziqin, 2023. "Environmental protection fee-to-tax and enterprise investment efficiency: Evidence from China," Research in International Business and Finance, Elsevier, vol. 66(C).
    17. Li, Chao & Ba, Shusong & Ma, Kejia & Xu, Yueling & Huang, Wenli & Huang, Niyuan, 2023. "ESG Rating Events, Financial Investment Behavior and Corporate Innovation," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 372-387.
    18. Yin, Zhichao & Li, Xinqi & Si, Dengkui & Li, Xiaolin, 2023. "China stock market liberalization and company ESG performance: The mediating effect of investor attention," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1396-1414.
    19. Yuming Zhai & Zhenghuan Cai & Han Lin & Ming Yuan & Ye Mao & Mingchuan Yu, 2022. "Does better environmental, social, and governance induce better corporate green innovation: The mediating role of financing constraints," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(5), pages 1513-1526, September.
    20. Grazia Dicuonzo & Francesca Donofrio & Simona Ranaldo & Vittorio Dell'Atti, 2022. "The effect of innovation on environmental, social and governance (ESG) practices," Meditari Accountancy Research, Emerald Group Publishing Limited, vol. 30(4), pages 1191-1209, April.
    21. Wunhong Su & Chun Guo & Xiaobao Song, 2022. "Media coverage, Environment Protection Law and environmental research and development: evidence from the Chinese-listed firms," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 24(5), pages 6953-6983, May.
    22. Wang, Huaxing & Li, Tianzi & Zhu, Junfan & Jian, Youting & Wang, Zeyu & Wang, Zengwen, 2023. "China's new environmental protection law: Implications for mineral resource policy, environmental precaution and green finance," Resources Policy, Elsevier, vol. 85(PB).
    23. Federica Doni & Marco Fiameni, 2024. "Can innovation affect the relationship between Environmental, Social, and Governance issues and financial performance? Empirical evidence from the STOXX200 index," Business Strategy and the Environment, Wiley Blackwell, vol. 33(2), pages 546-574, February.
    24. Hanna Hottenrott & Sascha Rexh�user, 2015. "Policy-Induced Environmental Technology and Inventive Efforts: Is There a Crowding Out?," Industry and Innovation, Taylor & Francis Journals, vol. 22(5), pages 375-401, July.
    25. Hu, Jiangfeng & Pan, Xinxin & Huang, Qinghua, 2020. "Quantity or quality? The impacts of environmental regulation on firms’ innovation–Quasi-natural experiment based on China's carbon emissions trading pilot," Technological Forecasting and Social Change, Elsevier, vol. 158(C).
    26. Charles J. Hadlock & Joshua R. Pierce, 2010. "New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1909-1940.
    27. Junqiang Li & Hao Ren & Changcheng Zhang & Qingxia Li & Kaifeng Duan, 2020. "Substantive Innovation or Strategic Innovation? Research on Multiplayer Stochastic Evolutionary Game Model and Simulation," Complexity, Hindawi, vol. 2020, pages 1-15, April.
    28. Chitra Sriyani De Silva Lokuwaduge & Kumudini Heenetigala, 2017. "Integrating Environmental, Social and Governance (ESG) Disclosure for a Sustainable Development: An Australian Study," Business Strategy and the Environment, Wiley Blackwell, vol. 26(4), pages 438-450, May.
    29. Chen, Lifeng & Khurram, Muhammad Usman & Gao, Yuying & Abedin, Mohammad Zoynul & Lucey, Brian, 2023. "ESG disclosure and technological innovation capabilities of the Chinese listed companies," Research in International Business and Finance, Elsevier, vol. 65(C).
    30. Ellen Pei‐yi Yu & Christine Qian Guo & Bac Van Luu, 2018. "Environmental, social and governance transparency and firm value," Business Strategy and the Environment, Wiley Blackwell, vol. 27(7), pages 987-1004, November.
    31. Victor Chernozhukov & Denis Chetverikov & Mert Demirer & Esther Duflo & Christian Hansen & Whitney Newey & James Robins, 2018. "Double/debiased machine learning for treatment and structural parameters," Econometrics Journal, Royal Economic Society, vol. 21(1), pages 1-68, February.
    32. Wen Chen & Ying Wu & Wei Zhang, 2021. "China’s New Environmental Protection Law and Green Innovation: Evidence from Prefecture-Level Cities," Complexity, Hindawi, vol. 2021, pages 1-13, May.
    33. Zhao, Xiaomeng & Chen, Yinna & Si, Deng-Kui & Jiang, Cun-Yuan, 2024. "How does environmental legislation affect enterprise investment preferences? A quasi-natural experiment based on China's new environmental protection law," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 834-855.
    34. Huang, Qiongyu & Fang, Jiali & Xue, Xiaolong & Gao, Hongming, 2023. "Does digital innovation cause better ESG performance? an empirical test of a-listed firms in China," Research in International Business and Finance, Elsevier, vol. 66(C).
    35. Oren Mooneeapen & Subhash Abhayawansa & Naushad Mamode Khan, 2022. "The influence of the country governance environment on corporate environmental, social and governance (ESG) performance," Sustainability Accounting, Management and Policy Journal, Emerald Group Publishing Limited, vol. 13(4), pages 953-985, May.
    36. Egi Arvian Firmansyah & Umar Habibu Umar & Rabiu Saminu Jibril, 2023. "Investigating the effect of ESG disclosure on firm performance: The case of Saudi Arabian listed firms," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(2), pages 2287923-228, October.
    37. Fafaliou, Irene & Giaka, Maria & Konstantios, Dimitrios & Polemis, Michael, 2022. "Firms’ ESG reputational risk and market longevity: A firm-level analysis for the United States," Journal of Business Research, Elsevier, vol. 149(C), pages 161-177.
    38. Xin Li & Fei Guo & Qiong Xu & Siwei Wang & Hongyun Huang, 2023. "Strategic or substantive innovation? The effect of government environmental punishment on enterprise green technology innovation," Sustainable Development, John Wiley & Sons, Ltd., vol. 31(5), pages 3365-3386, October.
    39. Alessio Baratta & Antonio Cimino & Francesco Longo & Vittorio Solina & Saverino Verteramo, 2023. "The Impact of ESG Practices in Industry with a Focus on Carbon Emissions: Insights and Future Perspectives," Sustainability, MDPI, vol. 15(8), pages 1-20, April.
    40. Peng Wang & Yihui He & Kengcheng Zheng, 2023. "Effects of the Implementation of the Broadband China Policy (BCP) on House Prices: Evidence from a Quasi-Natural Experiment in China," Land, MDPI, vol. 12(5), pages 1-15, May.
    41. Kai Chang & Xiaochang Cheng & Yiran Wang & Qiming Liu & Jie Hu, 2023. "The impacts of ESG performance and digital finance on corporate financing efficiency in China," Applied Economics Letters, Taylor & Francis Journals, vol. 30(4), pages 516-523, February.
    42. Dejan Glavas, 2023. "Do green bond issuers suffer from financial constraints?," Applied Economics Letters, Taylor & Francis Journals, vol. 30(14), pages 1887-1890, August.
    43. Oren Mooneeapen & Subhash Abhayawansa & Naushad Mamode Khan, 2022. "The influence of the country governance environment on corporate environmental, social and governance (ESG) performance," Sustainability Accounting, Management and Policy Journal, Emerald Group Publishing Limited, vol. 13(4), pages 953-985, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhou, Bing & Zhang, Linfeng & Yu, Fan, 2025. "A study on the impact of corporate executives' green perceptions on carbon disclosure," International Review of Economics & Finance, Elsevier, vol. 103(C).
    2. Gao, Jiaming & Zhang, Li, 2025. "A differentiated study of the impact of command and market-based environmental regulation on corporate R&D investments —take China's coal power industry chain as an example," Energy Policy, Elsevier, vol. 207(C).
    3. Huang, Yuxuan & Zhang, Qiancheng, 2025. "Patient capital and corporate ESG Performance: Empirical evidence from the Chinese stock market," International Review of Economics & Finance, Elsevier, vol. 103(C).
    4. Wang, Nianling & Song, Jiacheng & Chao, Zichen, 2025. "New environmental protection law, polluting enterprises and capital structure: A dynamic analysis," International Review of Financial Analysis, Elsevier, vol. 107(C).
    5. Ping Wei & Hongman Liu & Junbo Wang, 2026. "Towards Sustainable Agri‐Food Systems: The Role of Environment, Society, and Governance in Upgrading Export Quality," Agribusiness, John Wiley & Sons, Ltd., vol. 42(2), pages 569-589, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Liu, Xukang & Ma, Chao-Qun & Ren, Yi-Shuai, 2025. "ESG reactions to fintech: The role of cross-border capital flows," Research in International Business and Finance, Elsevier, vol. 76(C).
    2. Sun, Xian & Xiong, Xiaoyan, 2025. "ESG performance and corporate innovation," Research in International Business and Finance, Elsevier, vol. 76(C).
    3. Wang, Zhen & Tang, Pei, 2024. "Substantive digital innovation or symbolic digital innovation: Which type of digital innovation is more conducive to corporate ESG performance?," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 1212-1228.
    4. Tan, Xiujie & Liu, Gufeng & Cheng, Si, 2024. "How does ESG performance affect green transformation of resource-based enterprises: Evidence from Chinese listed enterprises," Resources Policy, Elsevier, vol. 89(C).
    5. Siqian Chen & Xin Leng & Kun Luo, 2024. "Supply chain digitalization and corporate ESG performance," American Journal of Economics and Sociology, Wiley Blackwell, vol. 83(4), pages 855-881, September.
    6. Li, Junjun & Wu, Tong & Liu, Bailu & Zhou, Ming, 2024. "Can digital transformation enhance corporate ESG performance? The moderating role of dual environmental regulations," Finance Research Letters, Elsevier, vol. 62(PB).
    7. Li, Mangmang & Tang, Jinghua & Wu, Dingwen, 2025. "Beyond borders and industries: How cross-ownership drives ESG performance in China’ low-polluting firms after environmental regulation," Energy Economics, Elsevier, vol. 148(C).
    8. Zhang, Hua & Lai, Jie, 2024. "Greening through ESG: Do ESG ratings improve corporate environmental performance in China?," International Review of Economics & Finance, Elsevier, vol. 96(PC).
    9. Jiayu Xie & Shanyong Wang & Haidong Li, 2025. "Exacerbate or alleviate? The new environmental protection law and corporate over-financialization," Economic Change and Restructuring, Springer, vol. 58(4), pages 1-30, August.
    10. Zhan, Huawang & Shen, Huayu & Guo, Hui, 2025. "Research on the impact of ESG scores on corporate substantive and strategic green innovation," Innovation and Green Development, Elsevier, vol. 4(1).
    11. Bao, Junsong & Yang, Liuyi, 2025. "Will ESG disclosure affect the green innovation level of SMEs?," Finance Research Letters, Elsevier, vol. 83(C).
    12. Zhang, Hua & Lai, Jie & Guo, Zheng, 2025. "When greenwashing meets ESG: Exploring the role of third-party ESG ratings in corporate greenwashing behavior," Journal of Business Research, Elsevier, vol. 200(C).
    13. Bai, Xiao & Zhao, Wenyao & Tian, Geran, 2024. "ESG certification, green innovation, and firm value: A quasi-natural experiment based on SynTao Green Finance's ESG ratings: A pre-registered report," Pacific-Basin Finance Journal, Elsevier, vol. 86(C).
    14. Haibo Sun & Tonghuan Bai & Youqing Fan & Zhonglu Liu, 2024. "Environmental, social, and governance performance and enterprise sustainable green innovation: Evidence from China," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(4), pages 3633-3650, July.
    15. Ni, Mingjie, 2025. "ESG disclosure and corporate human capital upgrading in China," Economic Analysis and Policy, Elsevier, vol. 86(C), pages 49-64.
    16. Gao, Xiang & He, Xixi & Sun, Chuanwang & Wu, Dongmei & Zhang, Jie, 2025. "Innovation in shouldering green responsibility: ESG performance and green technology innovation," Energy Economics, Elsevier, vol. 142(C).
    17. Mohy-ud-Din, Kamran, 2024. "ESG reporting, corporate green innovation and interaction role of board diversity: A new insight from US," Innovation and Green Development, Elsevier, vol. 3(4).
    18. Costantiello, Alberto & Drago, Carlo & Arnone, Massimo & Leogrande, Angelo, 2024. "Regional Research Intensity and ESG Indicators in Italy: Insights from Panel Data Models and Machine Learning," MPRA Paper 124185, University Library of Munich, Germany.
    19. Qian, Simeng, 2024. "The effect of ESG on enterprise value under the dual carbon goals: From the perspectives of financing constraints and green innovation," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 318-331.
    20. Guo, Kun & Li, Yichong & Zhang, Yunhan & Chen, Yingtong & Ma, Yanran, 2024. "Cross-country risk spillovers of ESG stock indices: Dynamic patterns and the role of climate transition risks," International Review of Financial Analysis, Elsevier, vol. 95(PB).

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecanpo:v:85:y:2025:i:c:p:2126-2141. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/economic-analysis-and-policy .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.