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

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.