Green finance policy, ESG rating, and cost of debt--Evidence from China

Climate change is causing increasing uncertainty for countries' economic growth and carbon emission control has become a global consensus. The People's Bank of China introduced a green finance policy (GFP) in the third quarter of 2017, which incorporates green finance into the Macro-Prudential Assessment (MPA) framework it has developed to assess commercial banks. Using the difference-in-differences (DID) methodology and data from 2440 Chinese A-share listed enterprises, we find that companies with higher ESG ratings experienced a significant decrease in their costs of debt (Cod) after the promulgation of this policy. Moreover, among the specific dimensions of ESG scores, Environmental scores have a more significant impact on corporates' Cod compared with those of Social and Governance. Further analysis also shows that the Cod of firms that are big-sized, stateowned, or from non-heavily-polluting industries decrease more significantly after the proposal of this GFP. These findings are relevant for subsequent revisions of the GFP and inspiring for industrial transformation and green finance system in both China and the world.