Green funds reduce corporate carbon emissions

A new firm-level empirical study has provided strong evidence that green funds are improving corporate carbon performance in China’s capital markets. The research, titled “Can Green Funds Improve Corporate Carbon Performance? Firm-Level Evidence from China” and published in Sustainability (2023), evaluates how the emergence of environmentally oriented mutual funds influences carbon emissions among publicly listed Chinese firms.

Leveraging a comprehensive dataset from 2016 to 2021, the study applies robust econometric models to measure the relationship between green fund ownership and reductions in carbon intensity, revealing notable regional and ownership-based differences.

How do green funds influence corporate carbon emissions?

Green funds, investment vehicles that prioritize firms with strong environmental credentials, are increasingly playing a role in China's financial ecosystem. The study finds that as green funds increase their holdings in a company, that company’s carbon emission performance improves significantly. Specifically, the study uses carbon emission intensity (total emissions per unit of revenue) as the core performance indicator and reveals that green fund ownership exerts a statistically significant negative effect on this metric.

By holding equity stakes, green funds can influence corporate behavior through several mechanisms: they send a clear market signal regarding environmental priorities, exert shareholder pressure during governance decisions, and prefer firms with proactive climate strategies. This shareholder engagement drives companies to disclose more environmental data, adopt cleaner technologies, and restructure production processes to reduce emissions.

To address potential endogeneity in ownership decisions, the study employs instrumental variable regression and entropy balancing methods. The results remain robust across multiple specifications, confirming that the relationship is not spurious and that green funds play a causal role in driving decarbonization within their portfolio companies.

Which firms benefit most from green fund involvement?

The study delves into the heterogeneity of green funds’ effectiveness across different firm types and regional contexts. A key finding is that non-state-owned enterprises (non-SOEs) exhibit more significant carbon performance improvement compared to their state-owned counterparts. This is likely due to non-SOEs being more responsive to investor pressure and reputational incentives. These firms also tend to operate with more flexible governance structures that allow quicker adaptation to environmental reforms.

In terms of geography, firms located in China's eastern provinces, the most economically advanced and regulatory mature regions, show greater responsiveness to green fund ownership. These areas have stronger environmental oversight, greater availability of green finance products, and better enforcement of climate-related disclosure norms, all of which amplify the influence of green funds.

The study also finds that heavily polluting industries, such as steel, chemicals, and energy, respond more significantly to green fund investments. These sectors, given their high emissions profiles and public visibility, are under greater scrutiny from regulators, investors, and consumers alike. Thus, when green funds enter the shareholder mix, the incentive to take immediate decarbonization actions is magnified.

What are the policy and market implications?

The findings of the study hold major implications for China’s dual goals of financial reform and carbon neutrality. As China aims to peak carbon emissions by 2030 and reach net-zero by 2060, green finance is expected to play a pivotal role in channeling capital into sustainable industries. This research confirms that green funds are not merely symbolic financial instruments; they have measurable environmental outcomes.

The authors recommend expanding the regulatory support for green fund development, including clearer classification standards, mandatory environmental disclosure for investee firms, and tax incentives for green investors. Additionally, building third-party ESG rating systems that can evaluate carbon performance more precisely would enable funds to better screen target firms.

From a corporate governance perspective, the study highlights the need for board-level climate oversight. Firms should institutionalize carbon accounting, link executive compensation to emission targets, and publish regular sustainability reports that include science-based targets.

For investors, the study provides evidence that green investing strategies can be both financially and environmentally effective. As more institutional and retail investors seek climate-aligned portfolios, green funds may serve as a bridge between financial return and social responsibility.

Furthermore, the study underscores the need for regional policy differentiation. Since green fund effectiveness is uneven across different regions and ownership structures, tailored local strategies, such as regional carbon markets, differentiated disclosure requirements, and capacity building for small firms, will be crucial to scale impact.