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The improvement of environmental performance (EP) of heavily polluting (HP) firms is critical to green development in China. In this research, we examine the impact of debt finance on HP firms’ EP in the context of China’s Green Credit Guidelines (GCGs) policy. Debt finance was found to have a positive impact on HP firms’ EP, and this finding is robust to a battery of tests. Additional tests reveal that this impact is exerted through corporate environmental investment. Moreover, our results suggest that the positive impact strengthens as government support increases. The heterogeneity analysis shows that the positive association between debt finance and EP of HP companies is more prominent in state-owned enterprises and HP firms located in the central and western regions. The above conclusions provide policy implications for the authorities of emerging economies seeking sustainable development.

Debt finance and environmental performance of heavily polluting companies in China: the perspective of the green credit guideline policy