Sustainability 15 04068

sustainability
Article
The Impact of Green Financial Policy on the Regional Economic
Development Level and AQI—Evidence from Zhejiang
Province, China
Min-Xing Wang 1,† , Lufei Huang 1, * and Zhen-Ming Chen 2, *,†
1 School of Financial Technology, Shanghai Lixin University of Accounting and Finance,

Shanghai 201209, China
2 School of Finance, Shanghai Lixin University of Accounting and Finance, Shanghai 201209, China
* Correspondence: lufei.huang@outlook.com (L.H.); cobright_chen@foxmail.com (Z.-M.C.)
† These authors contributed equally to this work.
Abstract: To explore the impact of green financial policy on the regional economic development
level and the Air Quality Index (AQI), this paper selected two pilot regions of green financial reform
policy to construct a quasi-experiment in Zhejiang Province. The results show that green finance
reform can reduce AQI and pass the parallel trend test and placebo test, showing strong stability.
Mechanism analysis shows that green finance reform can improve environmental quality mainly
by increasing urban expenditure on science and technology, the level of urban innovation, and the
number of urban enterprise innovations. Then, from a more general perspective, this paper discusses
the internal relationship between green finance policy, environmental pollution and its control, and
enterprise development and puts forward suggestions for future green finance policy formulation
and policy implementation.
Keywords: regional economic development level; green financial policy; AQI; difference-in-
differences method
Citation: Wang, M.-X.; Huang, L.;

Chen, Z.-M. The Impact of Green 1. Introduction
Financial Policy on the Regional
Promoting the vigorous development of green finance not only effectively solves the
Economic Development Level and
problem of ecological governance, but more importantly, it uses its emphasis on sustainable
AQI—Evidence from Zhejiang
development capacity to build a sustainable economic model. Under the influence of the
Province, China. Sustainability 2023,
stagflation and economic downturn caused by the COVID-19 pandemic and the obstruction
15, 4068. https://doi.org/10.3390/
of globalization caused by global tensions, profound and complex changes have taken
su15054068
place in the domestic and international environment, society, and enterprises themselves
Academic Editor: Wen-Hsien Tsai have shifted their focus from profitability to sustainability.
Received: 13 November 2022
Intuitively, the implementation of the above series of policies may promote enterprises
Revised: 15 February 2023
to save energy, reduce pollution, and improve the environment in pilot cities, but few
Accepted: 17 February 2023 scholars have quantified the average benefits of green finance reform on environmental
Published: 23 February 2023 pollution. As an intuitive expression of air quality and pollution, the Air Quality Index
(AQI) simplifies the monitored air concentration into a single conceptual index and also
provides an air quality sub-index for the main pollutants involved in air quality assessment.
Because the AQI is a good way to reflect environmental pollution, this paper uses the AQI as
Copyright: © 2023 by the authors. a proxy variable for environmental pollution and takes the green financial reform pilot zone
Licensee MDPI, Basel, Switzerland. policy of Zhejiang Province in 2017 as the research object to build an empirical test model.
This article is an open access article The difference-in-differences method (DID) was used to estimate the correlation degree
distributed under the terms and and transmission mechanism of green finance policy and regional economic development
conditions of the Creative Commons effects on environmental pollution. This research is willing to discover what impacts the
Attribution (CC BY) license (https://
release of the green financial policy has on the region’s economic development level and the
creativecommons.org/licenses/by/
AQI and to find the relationships between the factors being influenced by the establishment
4.0/).
Sustainability 2023, 15, 4068. https://doi.org/10.3390/su15054068 https://www.mdpi.com/journal/sustainability

Sustainability 2023, 15, 4068 2 of 23
of the green financial reform pilot zone. According to our hypothesis, we are expecting
to observe an increase in the regional economic development level and a decrease in the
AQI. Additionally, it is factually proven that the regional economic development level and
related indicators have different degrees of influence on the AQI.
By the end of 2020, the outstanding loans related to green industries in the 6 provinces
(autonomous regions) and 6 localities had reached CNY 236.83 billion, accounting for
15.1 percent of the total outstanding loans in the 6 provinces (autonomous regions) and
9 localities, 4.3 percentage points higher than the national average. Meanwhile, the out-
standing green bonds reached CNY 135 billion, a year-on-year increase of 66% (Table 1).
Table 1. China green finance reform and innovation pilot zone.
Time Province (District) Area Document

Overall plan for building green finance Reform Pilot
Guizhou Province Guian New District
Zone in Guian New District of Guizhou Province.
Quzhou City Overall plan of building green finance reform pilot
Zhejiang Province
Huzhou City zones in Huzhou and Quzhou of Zhejiang Province.
June 2017 Overall plan for building green Finance Reform Pilot
Jiangxi Province Ganjiang New District
(First batch) Zone in Ganjiang New Area of Jiangxi Province.
Overall plan for building a pilot zone for green Finance
Guangdong Province Guangzhou City Huadu District
reform in Guangzhou, Guangdong Province.
Changji Prefecture Overall plan for building green finance reform pilot
Xinjiang Uygur
Hami City zones in Hami, Changji and Karamay of Xinjiang
Autonomous Region
Karamay City Uygur Autonomous Region.
November 2019 Overall plan for building green Finance Reform Pilot
Gansu Province Lanzhou New District
(Second batch) zone in Lanzhou New Area of Gansu Province.
As an important representative of new economic development and financial market

construction in eastern coastal areas, Zhejiang Province has selected Huzhou and Quzhou
as reform pilots to actively explore regional green finance development modes and
Sustainability 2023, 15, x FOR PEER REVIEW real-
3 of 25
ization mechanisms with regional characteristics and promote economic structural reform
(Figure 1).
Figure 1. Geographical illustration of Huzhou and Quzhou.
From a global perspective, the two mainly recognized green financial policies are the
ISO Sustainable Finance Standards and the EU Sustainable Finance Classification Scheme.
The ISO Sustainable Finance Standard aims to promote the development of sustainable
finance through its formulation of the standard, transfer a large amount of capital to more
From a global perspective, the two mainly recognized green financial policies are the
ISO Sustainable Finance Standards and the EU Sustainable Finance Classification Scheme.
The ISO Sustainable Finance Standard aims to promote the development of sustainable
finance through its formulation of the standard, transfer a large amount of capital to more
sustainable low-carbon industries, and solve the problems of climate change, inequality,
and serious depletion of natural resources faced by the world. The EU Sustainable Finance
Classification Scheme is a specific measure to implement the EU’s carbon neutrality. For
67 economic activities, the technical screening criteria were formulated, and the future
application arrangements of the classification were proposed. Meanwhile, there are stan-
dards of other international organizations, such as the Equator Principles, which were
launched by the banking industry and provide a reference for commercial banks to effec-
tively prevent environmental and social risks. The Green Bond Principle (GBP) is intended
to enhance the transparency of green bond information disclosure and promote the healthy
development of the green bond market. The Climate Bond Standard (CBS) divides eight
categories of projects, mainly including energy, construction, industry, waste and pollution
control, transportation, information technology (Huang, Lufei et al. [1]), agriculture and
forestry, and climate adaptation. GBP and CBS are currently the most accepted green bond
standards in the international market and have played an important role in promoting the
transparency of the green bond market.
The main goal of the experimental zone can be summed up as follows: first, gradually
promote the green reform of financial systems, prepare a municipal (county) a balance
sheet and a special statistical system of natural resources, and provide institutional guar-
antee for green financial development; second, support the innovation of green financial
products, introduce direct financing models that serve the green economy, encourage green
and environmental protection enterprises to participate in direct financing and provide
them with preferential convenience, and promote the development of the green industry
from the supply side; third, support the green economy by means of transfer payment,
establish a number of green industry and green energy development funds, and encourage
the development of related green enterprises; and fourth, continuing to innovate new
insurance models in the context of sustainable development, actively explore the devel-
opment mode of green insurance represented by liability insurance, and try to introduce
several green insurance types, such as work safety and comprehensive liability insurance
for environmental pollution.
According to the research of Meng and Zhang [2], green finance can promote high-
quality economic development through environmental improvement effect. Take Huzhou
as an example; by the end of 2021, the balance of green loans in Huzhou was CNY
161.5 billion, with a year-on-year growth of 49.46% and a growth rate of 16.5 percent-
age points higher than the national average. There were 830 newly listed enterprises in the
Zhejiang Equity Trading Center, bringing the total number to 1113. In 2021, the new energy
industry chain Tianneng Shares and Microvast Holdings were listed on the Science and
Technology Innovation Board and NASDAQ. These data are consistent with the conclusion
of Lee and Lee [3], according to which the implementation of green finance policies can
improve the level of green economic development significantly.
The results show that environmental pollution has been effectively suppressed after
the implementation of the green finance policy. This conclusion still holds after a series
of robustness tests. Further mechanism analysis results showed that the green financial
policy, mainly through green innovation ability, can improve the overall enterprise urban
innovation ability; prompt the consciousness of high energy consumption and the high
pollution industry to increase production of environmental protection standard; transform
green production so as to guide the transformation and upgrading of industrial structure;
avoid policy intervention that may have a negative bias on the market economy; and at the
same time, in a micro and macro level, reduce the pollution of the environment to promote
ecological progress. Therefore, this research tends to reveal the transmission mechanism
and the average effect of green finance on the regional economy and environmental pollu-
tion, especially AQI. The possible conclusions provide firm support for the formulations of
green financial policies and the development of the green financial reform pilot zone, assist
in achieving peaking carbon dioxide emissions and carbon neutrality, as well as provide
references for green financial system improvement and global sustainable development.
2. Literature Review
At present, there are numerous and complex types of research on regional economic
development. This paper mainly discusses three literature clues directly related to this
study: the first is the factors influencing regional economic development; the second is the
possible causes of environmental pollution, especially AQI; and the third is the impact of
green finance policies. By sorting out the work of scholars in recent years, we can effectively
grasp the academic trends and hot topics in this research direction (Table 2).
Table 2. Literature review of research status.
Authors (Year) Literature Source Main Idea

Technology spillovers and agglomeration are serious
Koo [4] Journal of Planning Literature
issues in regional economic development.
Regional economic development is related to metropolitan
Thomas and Darnton [5] Journal of Planning Literature
economic growth.
Integration of sustainable energy projects into the regional
Klevas, Streimikiene, and Renewable and Sustainable
development process may create a positive effect on
Kleviene [6] Energy Reviews
regional development goals.
Transnational corporations and their activity are one of the
Yeung [7] Growth and Change
keys to understanding urban and regional development.
Matejovsky, Mohapatra, and Entrepreneurship plays an important role in determining
Growth and Change
Steiner [8] regional development.
Different globalization indices have different impacts on
Lee, Lee, and Chang [9] Global Economic Review
regional economic growth.
There is a significant double threshold effect of the
Renewable and Sustainable
Sun and An [10] regional technological innovation level on regional
Energy Reviews
sustainable development.
The structure of socioeconomic systems and provided
Physics Reports-Review Section of
Gao, Zhang, and Zhou [11] estimation of socioeconomic status for regional
Physics Letters
economic development.
Local food production benefits sustainable regional
Cvijanovic, Ignjatijevic, Tankosic,
Sustainability development, and it is a pillar of sustainable regional
and Cvijanovic [12]
development strategies.
Protected areas are increasingly created with the aim of
Duvivier [13] Revue D Economie Politique
also promoting local economic development.
Regional economic development is affected by various factors. Thomas and Darn-

ton [5] believed that regional economic development is related to metropolitan economic
growth and is dependent on four main conditions: technology, talent, tolerance, and good
quality of place. Matejovsky, Mohapatra, and Steiner [8] found that entrepreneurship plays
an important role in determining regional development as well as having more pronounced
and long-term stimulative effects on regional development. Lee, Lee, and Chang [9] noted
that different globalization indices have different impacts on regional economic growth.
Additionally, autocracy may harm regional development and is very sensitive to different
globalization variables’ specifications, which is unlike most previous works that commonly
define globalization as a strict economic characteristic, providing a new perspective for
us. Sun and An [10] pointed out that there is a significant double threshold effect of the
regional technological innovation level on regional sustainable development and that there
are positive interrelationships between the regional technological innovation level and
regional sustainable development at certain regional economic development levels. What
is more, Gao, Zhang, and Zhou [11] uncovered the structure of socioeconomic systems
and provided estimations of socioeconomic status for regional economic development. In
their words, socioeconomic processes provide foundations to quantify regional economic

development, map regional industrial structure, and infer individual socioeconomic status.
Many scholars have already set out to seek a solution to regional economic develop-
ment. Koo [4] critically reviews a wide range of issues related to technology spillovers
and agglomeration and proposes a comprehensive conceptual framework to understand
the mechanism of regional economic development, discovering that technology spillovers
and agglomeration are serious issues in regional economic development. The presence of
spillovers in a region attracts firms and thereby leads to a higher level of agglomeration.
At the same time, the agglomeration of firms facilitates localized spillovers through local
innovation networks. Yeung [7] believed that transnational corporations and their activity
are one of the keys to understanding urban and regional development in today’s globaliz-
ing world economy. They also believe there are close relationships between transnational
corporations and urban and regional development. Klevas, Streimikiene, and Kleviene [6]
put forward that the implementation of sustainable energy projects has a positive impact
on the security of energy supply, provides financial economies, improves comfort, and has
a multiplier effect for new jobs. Integration of sustainable energy projects into regional
development processes may have a positive external effect on regional development goals.
Local food production benefits sustainable regional development and should be considered
one of the pillars of sustainable regional development strategies. Cvijanovic, Ignjatijevic,
Tankosic, and Cvijanovic [12] discovered a phenomenon of local food producers sharing
a common heritage because of the cultural and historical ties in their regions, while con-
sumers tend to value food products produced locally. According to Duvivier [13], protected
areas are increasingly created with the aim of not only devoting time to natural conserva-
tion but also promoting local economic development. This can lead to increased tourism
and in-migration as well as fostering economic diversification, which can have different
effects of protected natural areas on local economies.
Before discussing the impact of green finance policy, we should first define the concept
of green finance. Green finance is a special financial activity or development strategy that
takes the financial industry as a service industry into consideration in the economic system.
It requires the financial industry to carry out specific financial business based on the basic
principles of environmental protection and sustainable development so as to achieve the
coordinated development of resources, the environment, the economy, and society, as well
as the sustainable development of the financial industry itself. Due to the late start of
the research on green finance in China, there are different focuses on the dispute over the
concept of green finance in the academic circle, and the resulting views are also different.
For the discussion of the impacts of green finance policies, we can divide it into two
parts. From a microscopic view, Zhang, Yang, Ding, and Qin [14] explained that green
finance could promote corporate green innovation by increasing the proportion of long-
term borrowing and improving corporate debt structure. We can generate the idea that
green finance can promote high-quality economic development through the environmental
improvement effect and significantly improve the ecological level of the regional economy.
The development of green finance has good consistency with environmental protection
and green economic development. It is conducive to improving the utilization efficiency
of resources and reducing pollutant emissions. Its system construction can promote in-
dustrial structure upgrades, optimize the energy structure, and promote technological
innovation. The development of green finance and reasonable environmental responsibility
are important means to improve the quality of economic growth.
From a macroscopic view, green finance can establish a green investment and financing
incentive mechanism, internalize environmental pollution into the financing cost of pollu-
tion enterprises, promote the flow of funds from high-pollution industries to low-pollution
industries, reduce the return on investment and capital availability of pollution industries,
promote innovation, low consumption, and greening of industrial development, increase
financial support for environmental protection enterprises, and significantly improve the
level of green economic development. Meng and Zhang [2] concluded that green finance
can promote high-quality economic development through environmental improvement.

Lee and Lee [3] stated that the implementation of a green finance policy promotes innova-
tive, low consumption, and green industrial development and significantly improves the
level of green economic development. Zhao, Taghizadeh-Hesary, Dong, and Dong [15] be-
lieved that accelerating the green transition of the economy is an effective way to conserve
energy and reduce emissions. Green finance can facilitate carbon emission reduction, and
China’s green growth not only mitigates the greenhouse effect directly but also affects CO2
emissions indirectly by accelerating the development of green finance.
In conclusion, the transmission mechanism of green finance policy to achieve high-
quality economic development can be followed by promoting industrial transfer, techno-
logical innovation, energy conservation, and environmental protection through financial
suppression of high-polluting enterprises and financial support for green enterprises. Most
of the empirical studies on green finance in the existing literature focus on single green
finance instruments and products, while the green finance reform and innovation pilot zone
integrates various green finance policies and is committed to the establishment of a com-
prehensive green finance system, which has a more comprehensive impact. Therefore, this
paper takes the green finance reform and innovation pilot zone policy as a quasi-natural ex-
periment to study the impact and mechanism of green finance on environmental pollution.
As for how to define the meaning of environmental pollution and continue to discuss
the influencing factors of environmental pollution, there is no unified conclusion on the
evaluation system of the environmental pollution index from the existing literature, and
environmental pollution mainly includes air pollution, water pollution, soil pollution, and
so on. In this research, we selected the Air Quality Index (AQI) as our index of environ-
mental pollution. Monteiro, Vieira, Gama, and Miranda [16] observed that significant
differences exist when specific urban and industrial sites are considered when calculating
the AQI. Han, Fang, Li, Wang, and Shi [17] researched the different effects of influencing
factors on air quality index (AQI) between different cities and expounded the unconsidered
heterogeneity of influential factors on different levels of air quality in the previous research.
In terms of influencing factors of ambient air quality, Pu, Luo, Wang, Wang, and
Kang [18] determined the influence of a single urban indicator on AQI value and estimated
the most influential urban indicators on the AQI, which indicated that the AQI value of
Chinese 161 cities shows a spatial dependency. They claimed that there are three adverse
urban driving factors on the AQI value: coal consumption of manufacturing, building area,
and coal consumption of the power industry. According to Xu et al. [19], the city-level
AQI was positively associated with vehicle population, industrial dust emission, and GDP
per capita, which cumulatively explained 67.5% of the spatial variations of the AQI based
on daily data of the AQI in 31 Chinese provincial capital cities. For more influencing
factors, Huang, Wang, and Wei [20] stated that China is experiencing severe environmental
degradation, particularly air pollution. According to the AQI, car ownership, steel output,
coke output, coal consumption, built-up areas, diesel consumption, and electric power
output contribute most to air pollution.
To sum up, the existing literature generally believes that industrial structure, energy
structure, and environmental protection regulation are the main factors affecting ambient
air quality. However, the quantitative research on environmental pollution caused by
green finance policies is still very limited. Therefore, this paper puts forward two possible
contributions from this research:
(1) This paper takes the green finance reform and innovation pilot zone policy as a
quasi-natural experiment to investigate the average effect of green finance on environmental
pollution and the transmission mechanism;
(2) This paper provides empirical support for green finance policies to effectively
curb environmental pollution and provides a reference for green finance development,
improvement of the green finance system, and long-term ecological civilization construction
for developing countries under the goal of carbon neutrality.
15, x FOR PEER REVIEW 8 of 25
3. Research Design and Empirical Model

3.1. Research Design3. Research Design and Empirical Model
3.1. Research
The figure below Design design graph of our study, showing the framework
is the research
The figure
of the research flow (Figure 2). below is the research design graph of our study, showing the framework of
the research flow (Figure 2).
Figure 2. FrameworkFigure
of research flow. of research flow.
2. Framework
3.2. Research Sample

3.2. Research Sample
Zhejiang Province is an important representative province of new economic develop-
Zhejiang Province
ment and is an important
financial marketrepresentative province
construction in eastern of new
coastal areas.economic
Geographically,devel-Zhejiang
opment and financial market construction in eastern coastal areas. Geographically,
borders the East China Sea to the east, Fujian to the south, Anhui and Jiangxi to the west,
Zhejiang borders the Shanghai, Jiangsu,
East China Seaand
to Anhui
the east, to the north,
Fujian to and
the has the Anhui
south, largest river
and in its territory,
Jiangxi to the
Qiantang River. In terms of topography, Zhejiang has a complex terrain consisting of plains,
the west, Shanghai, Jiangsu, and Anhui to the north, and has the largest river in its terri-
hills, basins, mountains, and islands. Its ecosystem is more diverse, which is conducive to
tory, the Qiantangthe River. In terms
practice of greenofprograms
topography, Zhejiang has
for diversification. a complex
In terms terrain
of climate, consist-
Zhejiang is located in
ing of plains, hills,the
basins, mountains, and islands. Its ecosystem is more diverse,
east of the subtropical zone with a humid monsoon climate, and the natural conditions which is
conducive to the are practice
superior.ofCompared
green programs
to other green for finance
diversification.
reform and In terms of
innovation pilotclimate,
zones in China,
Zhejiang is located in the east of the subtropical zone with a humid monsoon climate,Province
Guizhou Province and Jiangxi Province have a single terrain, Guangdong and has
a hot climate in the southernmost part of China,
the natural conditions are superior. Compared to other green finance reform and innova- Gansu Province has a dry climate and
a less diverse ecosystem, and Xinjiang’s natural conditions are less representative and
tion pilot zones in China, Guizhou Province and Jiangxi Province have a single terrain,
universal in China. To sum up, the geographical environment, economic development
Guangdong Province hasand
status, a hot climate
economic in the southernmost
development partprovinces
policies of other of China, inGansu
the twoProvince
batches of reform
has a dry climate and a less diverse
and innovation ecosystem,
pilot zones are more and Xinjiang’s
or less natural
different from thoseconditions
of Zhejiangare less There
Province.
representative andareuniversal
too manyin China. To
differences sum up,
in various the geographical
factors environment,
to effectively control the variables,eco-and it is
nomic development also difficult
status, and to establish
economic suitable and relevant
development experimental
policies of othergroups
provincesand corresponding
in the
control groups.
two batches of reform and innovation pilot zones are more or less different from those of
At the same time, Zhejiang Province was selected for the National Digital Economy
Zhejiang Province. There are too many differences in various factors to effectively control
Innovation and Development Experimental Zone in 2019. Among the provinces where the
the variables, and ittwois also
batchesdifficult
of reformto establish
and innovationsuitable and relevant
experimental zones experimental
are located, the groups
GDP growth
and correspondingrate control groups.
in recent years has been higher than that of other provinces, and the average is closer
At the same time,
to theZhejiang Province
national average wasItselected
level. for therole
plays a leading National Digital
in economic Economy with a
development
good economic foundation and higher regional
Innovation and Development Experimental Zone in 2019. Among the provinces where fiscal revenue. It can better support
the the
development of green finance, which is conducive to the study of the influence of green
two batches of reform and innovation experimental zones are located, the GDP growth
finance policies on the regional economic development level and AQI. In consideration of
rate in recent yearsthehas been higher than that of other provinces, and the average is closer
feasibility and extensibility of the in-depth sample survey and the effective use of the
to the national average level. It plays a leading role in economic development with a good
economic foundation and higher regional fiscal revenue. It can better support the devel-
opment of green finance, which is conducive to the study of the influence of green finance
policies on the regional economic development level and AQI. In consideration of the fea-
cost as far as possible, one province should be selected from China’s green finance reform
and innovation pilot zone. Zhejiang is undoubtedly the most representative area and more
able to find typical problems.
Huzhou City and Quzhou City are both important representatives of the new economic
development and financial market construction in the eastern coastal areas of the first batch
of China’s green finance reform and innovation pilot zones, and the influence of their green
finance policies on regional economic development level and AQI is representative. Based
on the General Plan released on 23 June 2017 for setting up 5 green finance reforms and
innovation pilot zones, Huzhou and Quzhou of Zhejiang decided to take the first green
finance innovation pilot zone as a policy impact, construct a natural experiment, identify
the impact of green finance policies on urban pollution, and try to analyze the mechanism
behind it. This policy enables Huzhou and Quzhou to have more reliable data sources
when studying the influence of green finance policies on regional economic development
levels and AQI compared with other reform and innovation pilot areas. Therefore, Huzhou
and Quzhou in Zhejiang Province are selected as the experimental group in this study.
3.3. Study Method

The difference-in-differences method is used in this research to estimate the correlation
degree and transmission mechanism of the green finance policy and regional economic
development’s effect on environmental pollution. Gu [21] verified that the use of multi-
stage DID can effectively alleviate endogenous problems, such as the correlation between
error items and explanatory variables caused by the absence of dependent variables, and
can also accurately capture the dynamic effects of the construction of different batches of
green financial cities.
After the implementation of a certain policy, the changes before and after the policy
in the treatment group can be observed at the same time, but this change also includes
the treatment effect of the policy and the change of the unobservable time trend. If the
time trend is assumed to be the same in the treatment group and the control group, a
two-difference approach can be used to remove the common time trend and obtain an
estimate of the average treatment effect. This is the main advantage of the DID method,
which is easy to calculate and accepts some form of selective error. However, at the same
time, it should be assumed that the same time trend must be maintained between the
treatment group and the control group, which is difficult to test. Therefore, the spatial
spillover effect is a certain defect in this study.
The use of the DID method has limitations because it is prone to biased estimation
because it might ignore spatial spillover effects. Therefore, methods of spatial difference-
in-differences (SDID) are emerging day by day. In the study of pollution emissions, the
spatial correlation between individuals has gradually attracted the attention of scholars.
Take air pollution as an example. Due to the mobility of the atmosphere, a heavily polluted
area will have an impact on the air quality of its neighbors. On the contrary, the active and
effective implementation of emission reduction measures in one place may also be copied
and learned by neighboring areas, thus achieving regional environmental optimization.
Based on the consideration of these spatial correlations and endogenous problems, the
SDID model is implemented. The model is mainly used to evaluate the effect of policy
impact on spatial dependence among variables.
The Stable Unit Treatment Value Assumption should be satisfied in the benchmark
DID model; that is, the policy intervention only affects the treatment group and will not
have a spillover effect on the control group. According to Kolak and Anselin [22], the SDID
model has better performance when considering spatial correlation and spatial spillover
effect. Compared with the benchmark DID model, the SDID model can make up for
the deficiency of insufficient observation of the strength and direction of the effect of the
control group when the policy is implemented by examining the spatial spillover effect to a
certain extent.
However, since the scope of policy influence in this paper involves nine regions in six
provinces, the spatial spillover effect is relatively low in this circumstance. At this time,
considering the spatial spillover effect, bringing the SDID model into use may cause greater
errors than the benchmark DID method. Meanwhile, in this study, the spatial spillover effect
is not clearly reflected in the indicators of AQI, such as city GDP, government spending,
household savings, and the number of industrial enterprises, so the DID method is used in
this study instead of SDID.
3.4. Data Explanation

This paper obtained the daily (24-h) AQI (Air Quality Index) of all prefecture-level
cities in Zhejiang Province from 2014 to 2018 from the National Urban Air Quality real-time
publishing platform of the China Environmental Monitoring Station. The index takes all
major pollutants such as PM2.5 , PM10 , SO2 , NO2 , O3 , and CO into consideration. First, the
IAQI (Individual Air Quality Index) of each pollutant is calculated separately, and then
the largest IAQI is taken as the AQI of the day. The following data were acquired from the
Statistical Yearbook posted by the National Bureau of Statistics and the Local Bureau of
Statistics of China (Table 3).
Table 3. Descriptive statistical results.
Observation Mean Standard Minimum Maximum

Variable Name
Number Value Deviation Value Value
Air Quality Index (AQI) 24,103 74.20 33.03 14 444
Annual average AQI 24,103 74.21 16.69 35.26 169.53
GDP (CNY 100 million) 19,874 4391 3306 886 14,312
Number of industrial enterprises 19,874 3698 2121 353 7602
Government spending/GDP 19,874 0.16 0.06 0.08 0.33
The output value of the secondary and tertiary
19,874 0.46 0.05 0.33 0.54
industries/GDP
Household savings/GDP 19,874 0.82 0.16 0.59 1.14
Fixed investment/GDP 19,874 0.68 0.19 0.41 1.23
Number of patents granted (logarithm) 8349 5.64 1.77 0 8.44
Number of patent applications (logarithm) 7986 9.66 0.94 8.02 10.88
Number of utility model patent Applications (logarithm) 7986 8.95 0.86 7.50 10.15
Index of innovation 12,364 3.02 1.06 1.26 5.39
In addition, we obtained the annual data of each city in Zhejiang Province from the
China City Statistical Yearbook, including city GDP, government financial expenditure,
the industrial output value of each industry, total import and export volume, fixed asset
investment, household deposits, etc. The number of urban industrial enterprises in the
sample period is also obtained from the Database of China Industrial Enterprises. To further
carry out the mechanism analysis, we also obtained the number of patent applications by
urban enterprises from the State Intellectual Property Office during 2014–2018 and took
the urban innovation index into account. Table 3 shows the descriptive statistical results
obtained after data processing.
3.5. Identify Strategies and Bias Test

Based on 23 June 2017, the People’s Bank of China, the China Banking Regulatory
Commission and other 7 ministries jointly issued the establishment of 5 green financial
reform and innovation experimental zone overall plans. Huzhou City, Zhejiang Province.
Quzhou City decided that the first green financial innovation experimental zone would be a
policy shock, so a natural experiment was constructed to identify green financial policy on
the influence of urban pollution and try to analyze the mechanism behind it. The following
four points will be used to discuss whether the policy has no exogenous problems.
In order to exclude interference from exogenous variables, it must be determined that
the time series data are non-specific at the beginning of its acquisition. During the time
icy on the influence of urban pollution and try to analyze the mechanism behind it. The
following four points will be used to discuss whether the policy has no exogenous prob-
lems.
In order to exclude interference from exogenous variables, it must be determined that
the time series data are non-specific at the beginning of its acquisition. During the time
Sustainability 2023, 15, 4068 series stationary analysis, there are no exogenous variables that cause a significant impact.
10 of 23
We present two hypotheses here:
H1: There
series are no significant
stationary analysis,exogenous disturbances
there are no exogenousduring the policy
variables period aofsignificant
that cause green finance re-
impact.
form in Huzhou and Quzhou.
We present two hypotheses here:
H2:
H1:There
Thereare
areno
no significant endogenous
significant exogenous disturbances
disturbances during
during the the policy
policy period
period of green
of green finance
finance reform
reform in Huzhou
in Huzhou and Quzhou.
and Quzhou.
H2:Therefore, wesignificant
There are no drew theendogenous
annual average AQI during
disturbances trend chart of each
the policy perioddistrict
of greencity in
finance
Zhejiang
reform inProvince fromQuzhou.
Huzhou and 2014 to 2018 according to relevant data, as shown below in Figure
3.
Therefore, we drew the annual average AQI trend chart of each district city in Zhejiang
Province from 2014 to 2018 according to relevant data, as shown below in Figure 3.
Figure 3. Annual average AQI trend of each city in Zhejiang Province during 2014–2018.
Figure It
3. can
Annual average
be seen thatAQI trend
since of although
2014, each city inthe
Zhejiang Province
AQI level during remained
in Huzhou 2014–2018.high before
2015, it has shown a good trend since 2016. The overall air quality level in the sample
It can
period is be seenthe
about thatsame
sinceas
2014,
thatalthough the AQI
in Hangzhou, level in Huzhou
Shaoxing, remained
and Jiaxing, highpollution
and the before
2015, it has shown a good trend since 2016. The overall air quality level
level is not prominent. The air quality of Quzhou has been at a middle to upper level in thein the sample
period
wholeissample
about the same
period andaseven
that in Hangzhou,
ranked as one Shaoxing, and Jiaxing,
of the top three cities inand
the the pollution
province until
level is not prominent. The air quality of Quzhou has been at a middle
2016. It can be seen that the pilot selection of the reform pilot zone is not targeted to upper level
at in
the
the whole
level sample
of urban air period and even ranked as one of the top three cities in the province
pollution.
until 2016. It canfrom
Secondly, be seenthe that the pilotofselection
perspective of the reform
the development pilot zone
conditions is notfinance,
of green targetedpilot
at
the level of urban air pollution.
areas of reform generally need to have the following three systems: first, the inclusive
Secondly,
financial from the
institution perspective
system of the
with policy development
banks conditions of
and large commercial green
banks as finance,
the mainpilot
body;
areas of reform generally need to have the following three systems: first,
second, the green inclusive financial technology system represented by digital operations; the inclusive
third, the green financial infrastructure system with credit investigation and the legal system
as the core. In this paper, the level of urban financial development is measured by resident
deposits and urban GDP. The following figure (Figure 4) shows the financial development
of cities with districts in Zhejiang Province from 2014 to 2018. It can be seen that the
financial development level of Huzhou and Quzhou is basically between the provincial
average level and has no outstanding performance. Therefore, the implementation of green
finance policies in Huzhou and Quzhou may not be due to consideration of the financial
development level.
ured by resident deposits and urban GDP. The following figure (Figure 4) shows the fi-
nancial development of cities with districts in Zhejiang Province from 2014 to 2018. It can
be seen that the financial development level of Huzhou and Quzhou is basically between
the provincial average level and has no outstanding performance. Therefore, the imple-
mentation of green finance policies in Huzhou and Quzhou may not be due to considera-
tion of the financial development level.
Figure 4. Financial development of cities in Zhejiang Province during 2014–2018.

Figure 4. Financial development of cities in Zhejiang Province during 2014–2018.
Thirdly, we found that since 2013, Huzhou and Quzhou have issued relevant notices
Thirdly, we
on emission found that
reduction since
plans for2013,
major Huzhou and Quzhou
pollutants every year, havebutissued
theyrelevant notices
are all regional
on emission
emission reduction
reduction plans
plans for major pollutants
formulated every year, but
in the implementation they areof
of “Notice allZhejiang
regionalProvin-
emis-
cial reduction
sion People’s Government on Printing
plans formulated and Distributingof
in the implementation Zhejiang
“NoticeProvincial
of Zhejiang Air Pollution
Provincial
Prevention
People’s and Control
Government on Action
Printing Plan
and(2013–2017)”
Distributing and a series
Zhejiang of policies.
Provincial AirIn addition,
Pollution the
Pre-
provincial
vention andgovernment
Control Actionhas issued annual emission
Plan (2013–2017)” andreduction
a series oftargets for each
policies. city divided
In addition, the
into districts
provincial every year,
government haswhich
issuedisannual
enough to prove
emission that thistargets
reduction policy forhaseach
a general impact
city divided
rather than targeting Huzhou and Quzhou alone, and the related
into districts every year, which is enough to prove that this policy has a general impact endogenous interference
is small.
rather thanIntargeting
addition,Huzhou
most of and
the policies
Quzhouintroduced
alone, and the during the endogenous
related reform period focused on
interference
iswater
small.pollution prevention
In addition, most ofandthecontrol,
policieswhich had little
introduced duringimpactthe on air quality.
reform periodThe Detailed
focused on
Rulespollution
water for the Implementation
prevention andofcontrol,Accountability
which had for Ecological
little impact Environmental
on air quality.DamageThe De-of
Leading
tailed RulesParty andImplementation
for the Government Officials (Trial), issued
of Accountability by Quzhou
for Ecological City in 2018, mainly
Environmental Dam-
focuses on the overall ecological environment governance,
age of Leading Party and Government Officials (Trial), issued by Quzhou aiming to give play
Citytointhe sub-
2018,
jective initiative of leading officials to strengthen implementation.
mainly focuses on the overall ecological environment governance, aiming to give play to It does not specifically
mention
the the prevention
subjective initiative of and control
leading of air
officials topollution,
strengthenand the specific impact
implementation. It doescannot
not spe-be
estimated.
cifically To sum
mention the up, the pilotand
prevention policy of green
control of air finance
pollution, reform canspecific
and the be seenimpact
as havingcan-a
relatively simple impact on the air quality of the two cities during
not be estimated. To sum up, the pilot policy of green finance reform can be seen as having the sample period.
Finally,
a relatively this study
simple impacttries to show
on the that the
air quality policy
of the only has
two cities an effect
during in Huzhou
the sample period.and
Quzhou and has no spillover to other cities. Throughout the
Finally, this study tries to show that the policy only has an effect in Huzhou green financial reformandex-
perimental zone in Zhejiang Province, since its creation of green
Quzhou and has no spillover to other cities. Throughout the green financial reform exper- financial development,
the achievements
imental zone in Zhejianghave always
Province, been confined
since to two
its creation ofplaces. Other cities
green financial are more com-
development, the
plete, even if the conditions are not seen in the green financial standard construction plan
(2017–2022). They have relevant experience with the promotion plan, which is enough to
prove that the policy is limited to Huzhou and Quzhou, where spillover effects are hard to
detect. This paper speculates that the central government is considering expanding green
finance on a larger scale after the completion of the first five-year development plan and
after gaining mature experience in green finance development.
The results show acceptance in hypotheses 1 and 2. In conclusion, this study believes
that the green finance reform and innovation pilot zone policy in 2017 have not had any
significant exogenous or endogenous disturbances on the air quality level of Zhejiang
Province during the policy period of green finance reform.
3.6. Econometric Model

In view of this, this paper sets up the following differential model:
1825
AQIit = βtreatit × postit + ∑ αt (dateit × XiT ) + γi + λt + ε it (1)
t =1
where AQIit is the air quality index of city i on day t; treatit × postit is the interaction term
of the dummy variable of the experimental group and whether the policy occurs or not. If
city i is Huzhou or Quzhou, treatit is 1; if i is another city in Zhejiang Province, 0 is taken; if
time t is on and after 23 June 2017, postit is 1; otherwise, 0 is taken. XiT is a group of control
variables at the city level, and T is 2014, 2015, 2016, 2017, and 2018, respectively. Since the
data at the city level are annual data, we multiply them by the time dummy variable (day)
dateit and turn it into a matrix. However, due to the reason of multiple collinearities, we
can only obtain (t − 1) units of α. In addition, in order to alleviate the problem of missing
variables as much as possible, city fixed effect γi and time fixed effect λt are added in this
paper, and all regression standard errors in this paper are clustered at the city level. ε it is
the error term.
4. Analysis of Empirical Results

In this section, we estimated the reference Equation (1), and the regression results are
shown in Table 4.
Table 4. Results of baseline regression.
(1) (2) (3)

AQI AQI AQI
−1.757 *** −1.463 ** −2.311 **
treatit × postit
(0.606) (0.728) (1.051)
19.56 *** 20.16 **
City GDP (logarithm)
(8.242) (11.159)
−6.065 48.0
Government spending/GDP
(25.771) (47.054)
13.76 * 7.63 ***
The output value of the secondary and tertiary industries/GDP
(8.697) (3.497)
18.18 * 14.96 **
Household savings/GDP
(10.613) (7.427)
−9.093 ** −11.35 **
Fixed investment/GDP
(4.180) (5.173)
11.48 ** 15.39 **
Number of industrial enterprises (logarithm)
(4.652) (8.071)
Urban fixation effect Yes Yes Yes
Date fixation effect Yes Yes Yes
Only winter samples are retained No No Yes
The number of samples observed 24,103 19,869 3960
R-squared 0.698 0.692 0.706
***, **, and *, respectively, indicate that the coefficients are significant at the significance levels of 1%, 5%, and 10%,
the same as below.
In column (1) of Table 4, no control variables are added; only the city-fixed effect and
date-fixed effect are controlled. The results show that green finance reform policies are
significantly negatively correlated with the daily average AQI of cities. In column (2), a
series of urban control variables are added based on column (1), and the results are still
robust. The difference between column (3) and column (2) is that only the observation
values of December, January, and February of each year will be taken, in the hope that the
stable weather in winter can eliminate the interference of geographical reasons. From the
results, the difference between the estimated results of the coefficients is not large and is
at least at the significance level of 5%. Therefore, if column (2) is listed as the benchmark
column, we can say that the green finance reform makes the city AQI decrease by 1.463,
which explains 19.89% of the index change before and after the policy takes place.
The control variables selected in this paper remain basically significant, and the di-
rection of the coefficient is consistent with intuitive performance, which better avoids the
problem of “Bad Controls”. Among them, urban GDP, secondary and tertiary industries,
fixed investment, and the number of industrial enterprises are all negatively correlated with
AQI, which answers our long-term concern that economic development, urbanization, or
industrialization will indeed lead to the deterioration of environmental quality. Nowadays,
regional economics urgently needs to seek new environmental governance; therefore, we
also note that the financial development level (residents’ deposits and the ratio of GDP) and
urban air quality have a significant negative correlation, meaning that in addition to the
green financial policy related to the environment, a higher level of overall financial develop-
ment can also help improve air quality. In the sixth part, this paper discusses the influence
mechanism of the improvement of the enterprise financing environment on environmental
improvement in detail, and in the seventh part, it makes an extended discussion.
5. Robustness Test
5.1. Parallel Trend Test
An important mechanism of this paper is that the reform of green finance policy leads
to a change in urban enterprises’ behavior, thus affecting the level of urban air quality.
Moreover, the change in air quality can only be achieved through a change in green finance
policy rather than through other means. Therefore, it is necessary to study whether the
difference between the treatment group (cities affected by green finance policy reform) and
the control group (cities not affected by green finance policy reform) is significant before
the time point of departmental change. If the air quality changes in the two groups do
not meet the parallel trend, the results of this paper should not be valid. To this end, the
following regression model is set up:
1 1825
AQIit = ϕ ∑ year p × treatit × postit + ∑ αt (dateit × XiT ) + γi + λt + ε it (2)
−2 t =1
In which year p represents the time point dummy variable before and after the year
of the policy occurrence. For example, year−2 represents the second year before the policy
occurrence, and year1 represents the first year after the policy occurrence. The rest of the
settings are similar to the reference Equation (1).
Figure 5 draws vintage coefficient changes before and after the implementation of
the policy and its implementation with a relative time point of 0 in 2017. Before the
implementation of the policy, in the control group (Huzhou and Quzhou City), there was no
significant difference with a relatively consistent trend. After the policy’s implementation,
the control of AQI levels has dropped significantly, showing that the results of this paper
are still solid.
5.2. The Placebo Test

The above DID model controls for fixed effects as well as major factors that may
cause the core explanatory variables to be non-random, and it passes the parallel trend
test. In spite of this, the interference of missing variables cannot be completely eliminated
theoretically. In view of this, a placebo test was performed on the baseline regression results
reported in column (2) of Table 2 by randomizing the control group and repeating the
experiment 500 times to obtain the probability density function of the estimated coefficient
(Figure 6).
Figure 5 draws vintage coefficient changes before and after the implementation of
the policy and its implementation with a relative time point of 0 in 2017. Before the imple-
mentation of the policy, in the control group (Huzhou and Quzhou City), there was no
significant difference with a relatively consistent trend. After the policy’s implementation,
the control of AQI levels has dropped significantly, showing that the results of this paper
are still solid.
Sustainability 2023, 15, x FOR PEER REVIEW 16 of 25
Figure 5. Parallel trend test.

Figure 5. Parallel trend test.
5.2. The Placebo Test

The above DID model controls for fixed effects as well as major factors that may cause
the core explanatory variables to be non-random, and it passes the parallel trend test. In
spite of this, the interference of missing variables cannot be completely eliminated theo-
retically. In view of this, a placebo test was performed on the baseline regression results
reported in column (2) of Table 2 by randomizing the control group and repeating the
experiment 500 times to obtain the probability density function of the estimated coefficient
(Figure 6).
Figure 6 reports the placebo inspection probability density function of the regression
coefficient, each scatters diagram represents every stochastic simulation. It is concluded
that the estimated coefficient is 0, the dark vertical lines state that visible estimated coef-
ficients obey normal distribution, and the red dashed line represents the benchmark re-
turn as the actual result. The estimated coefficient obtained in this paper is a small proba-
bility event, so the results are robust.
Probabilitydensity
Figure6.6.Probability
Figure densityfunction
functionofofplacebo
placebotest
testcoefficient.
coefficient.
Figure 6 reports
6. Mechanism Analysis the placebo inspection probability density function of the regression
coefficient, each scatters diagram represents every stochastic simulation. It is concluded that
6.1.
theReview of Mechanism
estimated coefficientAnalysis
is 0, the dark vertical lines state that visible estimated coefficients
obeyThis section
normal will studyand
distribution, the the
mechanism of green
red dashed finance reform
line represents affecting the
the benchmark environ-
return as the
ment. From a micro perspective, green finance affects the environment through
actual result. The estimated coefficient obtained in this paper is a small probability event, the fol-
lowing two mechanisms:
so the results are robust. the positive incentive to enterprises’ green innovation and the
inhibition of the investment of highly polluting enterprises. Incentives and constraints on
6. Mechanism
the financing side Analysis
are the core of these two mechanisms.
6.1. Enterprise
Review of Mechanism
innovation Analysis
requires a large amount of research and development invest-
ment,This
the risk
section will study environmental
is high, and the the mechanismbenefits brought
of green financebyreform
green innovation
affecting thecannot
envi-
be converted
ronment. Fromintoa corporate profits. Therefore,
micro perspective, under
green finance the assumption
affects of a rational
the environment through eco-
the
nomic person, as long as the cost of environmental regulation is lower than the benefits of
green technology innovation, green innovation behavior will not occur. In this case, en-
terprises lack the motivation to carry out green innovation and will only use low-cost
emission reduction technologies to avoid environmental regulations. Green finance, on
following two mechanisms: the positive incentive to enterprises’ green innovation and the
inhibition of the investment of highly polluting enterprises. Incentives and constraints on
the financing side are the core of these two mechanisms.
Enterprise innovation requires a large amount of research and development invest-
ment, the risk is high, and the environmental benefits brought by green innovation cannot
be converted into corporate profits. Therefore, under the assumption of a rational economic
person, as long as the cost of environmental regulation is lower than the benefits of green
technology innovation, green innovation behavior will not occur. In this case, enterprises
lack the motivation to carry out green innovation and will only use low-cost emission
reduction technologies to avoid environmental regulations. Green finance, on the one
hand, reduces green enterprise financing costs (such as lower interest) so as to increase the
expected return of green innovation; on the other hand, improving the environmental regu-
lation cost (which is dominated by the financing difficulty or policy of potential penalties)
further internalizes the cost of negative externalities, enabling enterprises to carry out green
innovation motivation enhancement. The existing literature supports this view from both
theoretical and empirical aspects. Through the principal-agent relationship between banks
and enterprises, considering the risks and market risks of enterprises’ green investment,
government subsidies for green credit enhance the motivation of enterprises to carry out
green innovation by increasing the expected returns of enterprises’ investment. The impact
mechanism of green innovation on the environment can be divided into the following three
stages: in the first stage, the technological progress of a single enterprise directly reduces
energy consumption and emissions by increasing energy utilization efficiency and reducing
pollutant emissions. In the second stage, the progress of single-factor technology promotes
the utilization rate of labor, capital, and other factors, which improves the total factor
productivity of the green industry. In the third stage, after the technological innovation
and upgrading of the green industry, along with the expansion of the scale of related indus-
tries, on the one hand, technological progress will flow to the upstream and downstream
industries through green investment and other forms, leading to the green transformation
of upstream and downstream enterprises; on the other hand, it will stimulate and promote
the green innovation activities of competitive enterprises and further expand the effect of
carbon emission reduction.
On the empirical level, from the environmental status of enterprises to the green
innovation caused by the change in financing costs, which leads to the improvement of
environmental quality, each node of this path is supported by the relevant literature. For
the first point, the disclosure of environmental information by enterprises can significantly
reduce their financing costs. Wang, Lei, Long, and Zhao [23] used the data from listed
companies to prove that the implementation of policies related to green credit reduced
the financing costs of green enterprises and increased the financing costs of high-polluting
enterprises. As for the promoting effect of green enterprise innovation, green credit made
the green innovation performance of related industries more active, which was manifested
by the significant increase in the number of green patents. Scholars used the data from
152 environmental protection enterprises to prove that the expansion of the green credit
scale can significantly promote the technological innovation of environmental protection
enterprises through the intermediary variable of R&D input.
Investment in highly polluting enterprises is inhibited by the following two mecha-
nisms: one is the direct effect of higher financing costs. Under the requirements of green
finance, highly polluting enterprises, especially state-owned enterprises that have had
easy access to loans in the past, will face higher financing costs. The increase in financing
costs reduces the available cash flow and reduces the returns on investment projects, thus
curbing excessive investment in polluting enterprises. Second, green finance has a stronger
supervision effect, thus effectively solving the principal-agent problem between banks and
enterprises. First, the supervision function of green finance has clear directivity. Taking the
securitization of green assets as an example, the securitization of green assets in mature
countries requires the rating and certification of third-party institutions. Secondly, the
green credit supervision function has long-term sustainability. Financial institutions are
required to track the progress of debtors’ projects over time and even have the power to
terminate credit. In this case, high-polluting enterprises are more motivated to change
the original investment mode, and the agency cost is significantly reduced. The existing
literature deals with both of these mechanisms. Wang, Qi, Zhou, Zhou, and Huang [24]
found that after the implementation of the Green Credit Guidelines, interest-bearing debt
financing and long-term liabilities of heavily polluting enterprises, especially state-owned
enterprises, decreased significantly, reflecting the direct effect of rising financing costs.
Others measured agency costs with the rate of management expenses and found that green
credit policies significantly reduced agency costs.
To sum up, green finance promotes green innovation and inhibits the investment of
highly polluting enterprises through financing constraints on micro-enterprises. From a
macro point of view, the proportion of low-polluting enterprises using green technologies
is increasing while the proportion of high-polluting enterprises is decreasing. At the same
time, the overall pollution level of the industry will decrease due to the spillover effect of
the technology.
6.2. Empirical Research

Based on the existing literature, this paper attempts to investigate the transmission
mechanism of green finance reform for the improvement of air quality in Huzhou and
Quzhou. We focus on the influence of green finance policy on the innovation ability of
enterprises in cities. The innovation development of cities can be examined from two
perspectives. First, the government plays a key role in China’s science and technology
investment system. From 2004 to 2015, the national total R&D expenditure increased at an
average annual rate of 19.81%. The second is innovation output. Enterprises are the main
body of innovation-driven development. The academic circle generally uses the number
of patent applications by enterprises to measure the situation of enterprise innovation.
This paper is trying to study the transmission mechanism of green finance from these two
perspectives. In terms of input, we selected the proportion of government expenditure on
science and technology in GDP as an indicator to measure the government’s support for
innovation. At the same time, for output we chose urban innovation and patent application
number as the explained variable into the city’s innovative index. This is because the
index number of patent applications compared to those commonly used. The index of the
fundamental basis is an application for a patent for invention for the city, but at the same
time, according to the estimate of the value of a patent duration, excluding the interference
of “junk patents”, the index also takes into account the number of new businesses set up in
cities and urban entrepreneurship.
Theoretically speaking, green finance policy reform will promote urban finance to
increase support for related industries, which is fully demonstrated by the regression
results in Table 5. The research investigated the transmission mechanism of green finance
reform on the improvement of air quality in Huzhou and Quzhou and focused on the
influence of green finance policy on the innovation ability of urban enterprises. It has
been proven above that the reform of green finance policy will have a significant impact
on the urban economy and promote enterprises to carry out green innovation. Therefore,
the government’s expenditure on science and technology will change. Meanwhile, the
green innovation of enterprises will have an important impact on urban AQI. We select
the proportion of government expenditure on science and technology in GDP as the index
and the urban innovation index and the number of invention patent applications as the
intermediary variables. It can be seen from Table 5 that green finance reform does promote
the green innovation ability of Huzhou and Quzhou. So far, we believe that green policies
promote the improvement of green innovation ability to some extent and then have an
important impact on the improvement of air quality in Huzhou and Quzhou. Column
(1) shows that green finance reform will significantly promote local financial support for
science and technology development. According to the National and Local Bureau of
Statistics, since regions in five provinces were designated as pilot zones for green finance in
2017, fiscal spending on science and technology has been on the rise and is higher than the
national level in the same period. Taking the data of Zhejiang Province as an example, the
fiscal expenditure on science and technology from 2016 to 2020 is CNY 269 billion, CNY
303.5 billion, CNY 380 billion, CNY 516 billion, and CNY 42.7 billion, respectively, with an
average annual growth rate of 12%; the proportion of government expenditure on science
and technology in the total government expenditure also increased year by year (except for
2020, which may be affected by the epidemic and decline), to 3.86%, 4.03%, 4.4%, 5.1%, and
4.2%, respectively, higher than the national figures of 3.5%, 3.58%, 3.77%, 3.96%, and 3.67%
in the same period. Columns (2), (3), and (4) all confirm that the green finance reform has
indeed promoted the innovation capacity of Huzhou and Quzhou and the improvement of
urban innovation output.
Table 5. Regression results of mechanism analysis.
(1) (2) (3)

Government Science and Urban Number of Invention Number of Invention
Technology Expenditure/GDP Innovation Index Patent Applications Patents Granted
0.00073 ** 0.93 *** 2.71 * 8.65 *
treatit × postit
(0.000279) (0.223) (1.603) (4.832)
−0.0035 −0.40 −3.20 * −9.02 **
City GDP (logarithm)
(0.00375) (1.453) (2.526) (4.295)
0.0077 0.28 *** −0.54 −8.86 ***
Government spending/GDP
(0.00608) (0.044) (8.676) (2.464)
The output value of the secondary 0.0039 1.55 1.40 19.31
and tertiary industries/GDP (0.00842) (1.147) (4.91) (17.05)
−0.0051 * 0.89 ** −1.40 * −8.86 ***
Household savings/GDP
(0.00248) (0.385) (0.809) (2.464)
−0.00081 0.88 ** 0.53 −7.65
Fixed investment/GDP
(0.00340) (0.510) (5.500) (12.48)
Number of industrial −0.0015 1.43 *** −0.61 8.29
enterprises (logarithm) (0.00156) (0.507) (3.577) (8.487)
Urban fixation effect Yes Yes Yes Yes
Date fixation effect Yes Yes Yes Yes
The number of samples observed 19,874 12,001 7986 7986
R-squared 0.943 0.998 0.993 0.994
***, **, and *, respectively, indicate that the coefficients are significant at the significance levels of 1%, 5%, and 10%.
As mentioned above, green finance promotes enterprises’ green innovation by chang-

ing the incentives at the financing end.
7. Discussion for Green Finance Policy and Pollution Control Mechanism

7.1. Green Finance Policy and Traditional Environmental Regulation: Inspiration and Externalities
Due to the nature of the environment as a public good and the externality of pollu-
tion, as well as the excessively extensive economic growth, rapid industrialization, and
urbanization models that have long focused on efficiency, China’s environmental problems
did not gradually improve until the government intervened. Before the construction of
the green finance system, the main method of government intervention is to formulate
different types of environmental regulations. The core two types are the command-type
regulations represented by administrative orders, laws, and regulations, and the economic
incentive regulations such as environmental taxes (negative) and environmental protection
subsidies (positive).
Under the influence of long-existing factors of the planned economy in China’s eco-
nomic system, environmental regulation and punitive economic incentives are the most
widely used environmental protection measures to restrict enterprises in China. Its effect
is similar to the inhibition effect of green finance on the investment of heavily polluting
enterprises mentioned above: no matter whether taxing pollutants or limiting or even
prohibiting enterprises from discharging pollutants, it is a rigid administrative constraint
on enterprises. Taxes and charges on pollution can create a “tax wedge” that allows com-
panies to adjust their production methods without distorting production in the market
economy. At the same time, charging for pollutants can promote green innovation by
enterprises through the “back forcing” mechanism, thus offsetting the negative impact of
higher production costs on enterprises. The existing works of literature have proven this
point from an empirical point of view. According to the study of Zhang, Liu, Wang, and
Zhou [25], with the gradual improvement of environmental regulation intensity, there is
an “inverted U-shaped” relationship between enterprise innovation degree and environ-
mental regulation intensity, and appropriate environmental regulation can indeed “force”
enterprises to carry out technological innovation.
Therefore, pollutant charging, such as green finance, can not only restrain the invest-
ment of high-polluting enterprises through economic constraints but also “force” enter-
prises to carry out technological innovation. However, in practice, this kind of environmen-
tal regulation faces two main problems: one is the phenomenon of pollution transfer to
the nearest place. Because the actual situation varies from place to place, the formulation
of environmental regulations is usually left to local governments. Therefore, the law en-
forcement strength of each regional administrative agency and the size of the pollutant tax
are bound to be different. This leads polluting companies to move from areas with high
environmental taxes to areas with low environmental taxes, which leads to a concentration
of pollution. Due to the objective needs of local governments to boost GDP and economic
growth, this phenomenon is widespread, and usually, backward areas have more incentives
to introduce high-polluting enterprises. Evidence have found that polluting enterprises
move to neighboring cities due to environmental regulations. They further point out that
the pollution transfer to nearby places intensifies the pollution level of industrial structures
in the places where the pollution is moved, thereby failing to improve the pollution at
the national level. Another problem with environmental regulation is that its implemen-
tation depends on laws and, therefore, on the degree of perfection of relevant laws and
the strength of local legal construction and enforcement. If local law enforcement and
judicial efficiency are low and the pollution behavior of enterprises cannot be effectively
improved, then the incentive effect of the policy will be greatly reduced. Research of
scholars shows that the construction of environmental protection courts can significantly
reduce local pollutant emission levels, so the effect of environmental regulation depends
on the construction of the rule of law to a certain extent.
Green finance and sustainable development policies may effectively solve the above
two problems. First of all, as environmental protection tax has been collected, the local
government cannot collect it effectively due to various objective reasons. There may even
be a situation where the local government acquiesces in the low payment of environmental
protection tax for the sake of the economic growth level. The central government actually
formulated a unified environmental protection tax for each administrative region and left
some local governments to play the subjective initiative combined with the objective reality
of the local economic environment to better balance the external compensation. The unified
tax target of the central government can help reduce the complexity of tax collection and
solve the problem of the transfer of production pollution emissions to different places. As a
common means to compensate for positive externalities and punish negative externalities
in many countries, the tax wedge has proven its good enforceability, high compensation
efficiency, and low interference with the operation of the market economy.
Environmental protection subsidies are similar to green finance, both of which provide
positive economic incentives to green enterprises to promote their emission reduction.
The big problem with environmental subsidies, however, is that they do not encourage
firms to innovate. Based on the “predatory hand” theory of government intervention, after
enterprises receive environmental protection subsidies, they need to meet the requirements
of the government and even allocate resources under the “domination” of the government,
thus crowding out the motivation and resources for enterprises to engage in technological
innovation. For example, the domestic policy “Several Provisions on Strengthening the
Management of Environmental Protection Subsidy Funds” points out that “the funds
of environmental protection subsidy shall be used for the management of key pollution
sources and comprehensive environmental management, and shall not be diverted to
other purposes” so that there is no incentive for technological innovation. On the contrary,
according to the above discussion, green finance plays a strong role in promoting the green
innovation of enterprises.
To sum up, compared with traditional environmental regulation tools, green finance
not only acts as a more direct incentive to solve the problem of the transfer of polluting enter-
prises but also positively stimulates the innovation of environmental protection enterprises.
This effectively solves some defects faced by traditional environmental regulation tools.
7.2. Green Finance Development Status and Policy Suggestions

7.2.1. The Development of Green Finance Policy Practice in Developing Countries
Take China, for example; in recent years, the development of green finance has fol-
lowed two clues of domestic and international circular development patterns. On the one
hand, the construction and gradual improvement of the green finance system can be real-
ized through innovation and exploration in China. On the other hand, it is internationally
oriented and actively carries out exchanges and cooperation.
Extended to the vast majority of developing countries, the development process of
green finance could be summarized as having the following four aspects:
First, the system of green financial products should be continuously improved. It is
mainly manifested in the continuous enrichment of green financial products and services,
the gradual expansion of the market scale, and the development of a diversified and inte-
grated green financial credit product system from single-function credit. For example, green
insurance could cover highly polluting industries such as heavy metals and petrochemicals,
and green investment and financing services such as standardized debt financing should
be developed rapidly.
Second, establishing supporting regulations and systems for green finance has been
gradual. At present, great progress has been made in the construction of China’s green
finance, including the construction of statistical and regulatory systems, the formulation of
relevant standards for green finance, the mandatory and normative disclosure of environ-
mental information, and the cultivation of multiple green investment entities. Concepts
such as ESG and responsible investment are emerging.
Third, progressing in the construction of a carbon emission trading market. Since
China launched carbon emission trading pilot programs in Beijing, Shanghai, and other
places in 2011, the development performance has been good, accumulating multi-level
experience for the establishment of a unified regional or national carbon market.
Fourth, continually explore the development model of green finance. At the national
level, the green finance reform and innovation pilot zone described in this paper have
achieved a lot since their implementation, which has accumulated a personalized expe-
rience for building a national green finance system. At the regional level, green finance
has become an important part of the regional development strategy for the integration
of the Guangdong-Hong Kong-Macao Greater Bay Area and the Yangtze River Delta,
providing valuable experience for the construction of sustainable economic and social
development and the transformation and upgrading of green finance in the new era. At the
city level, many cities in China have ranked among the top 30 in the Global Green Finance
Index, (G.G.F.I.).
In addition, developing countries should shift from learning from foreign experience
and absorbing international standards to integrating with the international community
and promoting the development of green finance. As one of them, China has actively
carried out international cooperation and exchanges in green finance. The important policy
documents and contents of international cooperation in green finance are shown in the
following table (Table 6).
Table 6. Policies and contents of international cooperation in green finance in China.
Release Time Policy Document The Main Content

China has made “promoting international cooperation in green
finance” an important part of building a green finance system
and put forward specific measures in three aspects: “extensively
Guidelines on building a green
August 2016 carrying out international cooperation in green finance”,
financial system
“actively yet prudently promoting the two-way opening of the
green securities market”, and “promoting the green level of
outbound investment”.
It emphasizes “introducing international capital and foreign
investors” and “actively learning from international good
Guidelines on Promoting investment and practices and financial innovation”, such as including the
October 2020
financing in response to climate change government’s green fund and private capital cooperation (PPP)
model and a mandatory information disclosure mechanism in
policy documents.
China will support financial institutions and related enterprises
to carry out green financing in the international market,
Guidelines on accelerating the establishment promote the convergence of international green finance
February 2021 and improvement of a green, low-carbon and standards, and orderly promote the two-way opening of the
circular economic development system green finance market as an important part of the current
establishment of a sound green, low-carbon, and circular
development economic system.
In conclusion, the international development direction and overall goals of China’s

green finance are mainly reflected in the following two aspects.
First, we need to establish an international cooperation mechanism on green finance to
promote global cooperation on green finance and build a win-win situation through mutual
learning. In 2016, China, as the eighth rotating president of the G20, introduced green
finance into the G20 agenda in a groundbreaking way and launched a Green Finance Study
Group at the G20 Summit. At the end of 2017, the People’s Bank of China, the European
Central Bank, and other foreign banks and observer organizations jointly established the
Central Bank and Regulatory Green Finance Network (NGFS) and the academic support
organization INSPIRE. In November 2018, the Green Finance Committee of the China
Society for Finance and Banking and the City of London Organization jointly released
the Belt and Road Green Investment Principles (GIP) to promote green and sustainable
investment in Belt and Road countries and regions.
Second, promote the convergence of China’s green finance standards with major global
green finance standards to promote cross-border investment in green finance through
standardization. In March 2017, the People’s Bank of China and the European Investment
Bank jointly issued a statement establishing the Joint Green Finance Initiative. At present,
the China-Eu Green Finance Common Classification Catalogue has been completed, and
the catalog has been published on the Sustainable Finance Platform (IPSF), which was
jointly launched by the above economies in June 2022.
7.2.2. Policy Suggestions on Green Finance Development

In the context of carbon neutrality, the development of green finance is facing new
challenges. Currently, many developing countries that have carbon neutral transformation
and upgrading still have existing problems. To achieve the goal of green transformation
changes and the new crown outbreak situation because of the climate environment uncer-
tainty, there is a potential financial risk. There is also a lack in the national macro level and
the national carbon neutral integration of financial support. Therefore, all of these practical
problems prompted us to focus on policy suggestions on the development of green finance.
First, further, improve the green finance system by promoting the construction of a
green finance market and increasing green investment and financing. Promote the inno-
vation of the carbon financial product system and the healthy development of the carbon
trading market, unify the national carbon market under the mix of planned indicators
and market economy, and try to establish an open carbon trading channel. Improve the
incentive mechanism to guide the transformation of social capital into green industries. We
will build platforms for big data financing and supervision and promote the integrated
development of fintech and green finance.
Second, we need to improve the risk management mechanism for green finance.
Short-term production losses on natural endowments caused by environmental protection,
systemic market risks caused by macroeconomic factors, and the transformation and
upgrading of the social and economic structure during the construction of a green finance
system are all sources or potential sources of green finance risks. Develop assessment and
practice areas with the ESG concept and responsible investment as the core, and enhance
corporate responsibility and awareness of environmental governance for risk prevention;
improve the risk management mechanism; establish a standard and unified mandatory
green finance information disclosure system; improve financial institutions’ ability to
analyze and manage climate and environmental risks; and make money by improving
financial institutions’ ability to avoid and disperse green finance risks. Administrative
support should be given to the green finance industry for risk control. If necessary, local
government credit guarantees or government purchase and transfer payments can be used
to compensate for the risks of the green finance industry.
Third, establish a sustainable green finance development model guided by the gov-
ernment and dominated by the market. Make full use of the advantages of China’s green
finance policy system, improve and optimize the market mechanism, and give play to the
government’s guiding role in resource allocation and other fields. The government will
encourage the participation of multiple entities. Through overall planning, the government
will integrate and invigorate the resources and strengths of multiple entities, including reg-
ulators, financial institutions, and enterprises, and actively explore a green transformation
path that combines social responsibility with economic benefits.
Fourth, we should promote the experience of pilot reforms, explore suitable devel-
opment directions for green finance, and complete the transformation and upgrade from
the original economic model to the green finance system. Drawing on the achievements
of the existing green finance reform and innovation pilot zones, local governments, under
the leadership of the central government, will give full play to their subjective initiative
to further explore the green finance development model and establish a green finance de-
velopment regional model with strong enforceability, sustainability, a complete industrial
chain, and distinctive features in each administrative region.
Fifth, promote the integration of green finance and the concept of sustainable devel-
opment to form a more natural, social, ecological, economic, and efficient use of natural
resources in the process of the basic relationship to ensure global sustainable development.
At the micro level, the sustainability of enterprise operations focuses on the formation
of a healthy, stable, and continuously growing business model and the formation of a
positive and mutually beneficial game between operators, capital owners, employees, and
other stakeholders. At the macro level, compared with the previous system, the economic
construction guided by the concept of sustainable development focuses more on the pre-
vention, avoidance, and dispersion of systemic and non-systemic risks, which is conducive
to the stability and prosperity of the social economy.
8. Conclusions
In this paper, the impact of green finance policy reform on urban air quality and the
transmission mechanism were studied by using the 2017 “General Plan on the Establish-
ment of Five Green Finance Reform and Innovation Pilot Zones” as a policy impact and
relying on the 2014–2018 Chinese Urban Air Quality Index. The research results show
that green financial reform can reduce the AQI by 1.463, which explains 19.89% of the
change in index before and after the policy. Green financial reform reduces AQI levels by
influencing important regional economy factors such as city GDP, government spending,
household savings, and the innovation index. There are positive correlations between
green financial reform and regional economic development. The parallel trend test and
placebo test showed strong stability. Therefore, we also note that the fact that the financial
development level (residents’ deposits and the ratio of GDP) and urban air quality have a
significant negative correlation means that, in addition to the green financial policy related
to the environment, a higher level of overall financial development can also help improve
air quality. Negative correlations exist between the regional economy and city AQI. Mecha-
nism analysis shows green finance promotes enterprises’ green innovation by changing the
incentives at the financing end.
Environmental pollution has been effectively curbed after the implementation of the
green financial policy. It mainly promotes the high energy consumption and high pollution
industries to consciously improve the production environmental protection standards and
transform green production by improving the green innovation ability of enterprises and
the overall innovation ability of cities, so as to guide the transformation and upgrading of
the industrial structure, avoid the possible negative bias impact of policy intervention on
the market economy, reduce environmental pollution at the micro and macro levels, and
promote the process of ecological civilization construction.
This study provides empirical support for green finance policies to effectively curb
environmental pollution and provides reference for green finance development, improve-
ment of the green finance system, and long-term ecological civilization construction for
developing countries under the goal of carbon neutrality. In domestic views, it will be
referential for the formation of green financial policies and the development of green fi-
nancial reform pilot zone. As for the global influences, the study will assist in peaking
carbon dioxide emissions and achieving carbon neutrality, as well as serve as a reference for
green financial system improvement and global sustainable development. Raising regional
economic development levels through the macroeconomic regulation of green financial
policies can be effective for controlling air quality such as the AQI. Developing countries
with similar statuses can draw on the experiences of the processing method, the results of
China’s green financial reform pilot zones, and the establishment of green financial policies.
This study could be further optimized by a comprehensive analysis of more indicators.
Additionally, both regions, which are just focused on the realization of green finance, could
be further expanded after being extended to more pilot regions that aim to explore the
support for modern agriculture and clean energy or the use of green resources.
Author Contributions: Conceptualization, M.-X.W. and Z.-M.C.; methodology, M.-X.W. and Z.-M.C.;
software, Z.-M.C.; validation, M.-X.W. and Z.-M.C.; formal analysis, M.-X.W.; investigation, L.H.;
resources, Z.-M.C.; data curation, M.-X.W.; writing—original draft preparation, M.-X.W. and Z.-M.C.;
writing—review and editing, L.H.; visualization, M.-X.W. and Z.-M.C.; supervision, L.H.; project
administration, L.H. All authors have read and agreed to the published version of the manuscript.
Funding: The project “iESG—an integrated green financial service platform for small and medium-
sized enterprises (The 8th China International College Students’ “Internet+” Innovation and En-
trepreneurship Competition 2022)”; The project “Analysis and empirical study on the transmission
mechanism of green financial reform on the ecological environment (the 18th “Challenge Cup” Na-
tional undergraduate curricular academic competition works 2023)”; the project “Digital inclusive
financial impact mechanism”.
Institutional Review Board Statement: Not applicable.
Informed Consent Statement: Not applicable.
Data Availability Statement: Not applicable.
Conflicts of Interest: The authors declare no conflict of interest.
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1 School of Financial Technology, Shanghai Lixin University of Accounting and Finance,

Citation: Wang, M.-X.; Huang, L.;

Sustainability 2023, 15, 4068. https://doi.org/10.3390/su15054068 https://www.mdpi.com/journal/sustainability

Table 1. China green finance reform and innovation pilot zone.

Time Province (District) Area Document

As an important representative of new economic development and financial market

Figure 1. Geographical illustration of Huzhou and Quzhou.

Table 2. Literature review of research status.

Authors (Year) Literature Source Main Idea

Regional economic development is affected by various factors. Thomas and Darn-

their words, socioeconomic processes provide foundations to quantify regional economic

can promote high-quality economic development through environmental improvement.

Sustainability 2023, 15, 4068 7 of 23

3. Research Design and Empirical Model

3.2. Research Sample

3.3. Study Method

3.4. Data Explanation

Table 3. Descriptive statistical results.

Observation Mean Standard Minimum Maximum

3.5. Identify Strategies and Bias Test

Figure 4. Financial development of cities in Zhejiang Province during 2014–2018.

3.6. Econometric Model

4. Analysis of Empirical Results

Table 4. Results of baseline regression.

(1) (2) (3)

5.2. The Placebo Test

Sustainability 2023, 15, x FOR PEER REVIEW 16 of 25

Figure 5. Parallel trend test.

5.2. The Placebo Test

6.2. Empirical Research

Table 5. Regression results of mechanism analysis.

(1) (2) (3)

As mentioned above, green finance promotes enterprises’ green innovation by chang-

7. Discussion for Green Finance Policy and Pollution Control Mechanism

7.2. Green Finance Development Status and Policy Suggestions

Table 6. Policies and contents of international cooperation in green finance in China.

Release Time Policy Document The Main Content

In conclusion, the international development direction and overall goals of China’s

7.2.2. Policy Suggestions on Green Finance Development

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