Market-based environmental regulation and ESG greenwashing: Evidence from environmental liability insurance11We thank Gang Qiao and seminar participants at Guangdong University of Foreign Studies for helpful suggestions. We acknowledge the financial support of Guangzhou Science and Technology Bureau (grant no. 2025A04J3449), Guangdong Provincial Education Science Planning Project (Higher Education Special Project, Project Number: 2021GXJK386), the Project of the Higher Education Science Research Planning of the China Association of Higher Education: Research and Practice on the Construction of University-Enterprise Cooperative Data Science Laboratory (Financial Big Data Laboratory) (Project Number:23CJ0104)

Against the backdrop of escalating ESG greenwashing risks demanding robust regulatory solutions, this study examines the efficacy of Environmental Liability Insurance (ELI) as a market-based governance tool to enhance corporate environmental accountability, leveraging China’s 2018 ELI pilot policy as a quasi-natural experiment. Findings reveal that ELI significantly reduces ESG greenwashing by mitigating managerial short-termism, enhancing environmental transparency, and fostering green innovation. Heterogeneity analysis shows that the inhibitory effect of ELI on ESG greenwashing is more pronounced in non-SOEs, financially constrained firms, non-key polluters, weakly governed enterprises, firms outside the Yangtze River Economic Belt, and those in highly competitive industries. This study contributes to the literature on market-driven environmental governance by demonstrating how financial instruments can complement traditional regulatory approaches. It provides valuable insights for policymakers to promote the nationwide implementation of ELI and to tailor its application based on firm-specific characteristics, thereby facilitating sustainable corporate practices.