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

Author

Listed:
  • Fatima Batool

    (School of Finance, Central University of Finance and Economics, Beijing 102206, China)

  • Ibrahim A. Alhidary

    (Department of Animal Production, College of Food and Agriculture, King Saud University, Riyad 12372, Saudi Arabia)

  • Jhansi Rani Boda

    (School of Business, GITAM University, Hyderabad 502329, Telangana, India)

  • Belal Mahmoud Alwadi

    (Department of Basic Sciences, Al-Zaytoonah University of Jordan, Queen Alia Airport Street, Amman 11733, Jordan)

  • Khurshid Khudoykulov

    (Department of Finance and Tourism, Termez University of Economics and Service, Termez 190111, Uzbekistan
    Department of Finance and Financial Technologies, Tashkent State University of Economics, Tashkent 100066, Uzbekistan
    Department of International Scientific Journals and Rankings, Alfraganus University, Tashkent 100190, Uzbekistan)

  • Mohammad Haseeb

    (Institute of Regional Economics Research, School of Economics and Management, Wuhan University, Wuhan 430072, China
    Department of Management Studies, Graphic Era Deemed to be University, Dehradun 248002, Uttarakhand, India)

Abstract

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.

Suggested Citation

  • Fatima Batool & Ibrahim A. Alhidary & Jhansi Rani Boda & Belal Mahmoud Alwadi & Khurshid Khudoykulov & Mohammad Haseeb, 2025. "Balancing Sustainability and Profitability: The Financial Effect of Green Innovation in Chinese High-Pollution Industries," Sustainability, MDPI, vol. 17(8), pages 1-29, April.
    • Handle: RePEc:gam:jsusta:v:17:y:2025:i:8:p:3610-:d:1636231
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    References listed on IDEAS

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    Cited by:

    1. Arnone, Massimo & Costantiello, Alberto & Drago, Carlo & Leogrande, Angelo, 2025. "ESG Drivers of Financial Development: A Multimethod Analysis of Domestic Credit to the Private Sector," MPRA Paper 127044, University Library of Munich, Germany.

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