When life gives you lemons: green credit policy and corporate environmental responsibility of heavily polluting firms

Purpose The green credit policy regulates corporate environmental responsibility practices of heavily polluting firms by influencing their financial resources, thereby driving sustainable development. This study aims to explore the strategic decisions of firms to evaluate whether the policy has achieved this outcome. Design/methodology/approach Using the implementation of the green credit policy in 2012 as a pivotal event, the authors conduct a quasi-natural experiment to investigate the impact of the policy on firms’ corporate environmental responsibility. Findings The authors find that heavily polluting firms will reduce corporate environmental responsibility practices following the green credit policy. Further tests suggest that the green credit policy curtails corporate environmental responsibility practices by impacting bank credit and trade credit. In addition, such a link is stronger among firms characterized by weaker political connections and poorer previous performance. Moreover, reducing corporate environmental responsibility practices aids in alleviating firms’ financing constraints and enhancing core business performance in the next period, which indicates that firms have sacrificed sustainable development to ensure short-term survival. Practical implications The green credit policy limits corporate environmental responsibility practices of heavily polluting firms. This finding provides empirical evidence and relevant recommendations for the formulation and implementation of green finance policies. Social implications Governments, financial institutions and firms should fully grasp the interactions between the green credit policy and corporate strategy. A series of improvement and safeguard measures are essential to mitigate the unintended negative effects of the policy and to promote sustainable development. Originality/value The findings align with prospect theory and provide empirical evidence for the ongoing debate regarding whether green credit policy can achieve the expected outcomes, thereby broadening the research scope on green finance.