Does transition finance policies persistently fuel green innovation in brown firms? Investigating the roles of ESG rating and bank connection

Most transition finance policies encourage, rather than mandate, brown firms to engage in green innovation, potentially leading to strategic rather than persistent investment in research and development (R&D). This study investigates the impact of a transition finance policy — the China Green Bond Endorsed Project Catalogue — on 1290 Chinese publicly listed firms operating within brown industries. The findings indicate that the transition finance policy increases access to bank credit and fosters R&D investment persistency among brown firms, resulting in enhanced quantity and quality of green innovation. The success of transition finance policy can be attributed to brown firms with higher environmental, social and governance (ESG) ratings as well as those without bank connections. Firms with higher ESG ratings tend to have better access to bank credits, which facilitates more sustained R&D investments. Conversely, despite receiving fewer bank credits, brown firms without bank connections exhibit stronger performance in maintaining persistent R&D investments.