Environmental Regulation, Green Technology Innovation and Default Risk
Wei Xiaoyun, Han Liyan
School of Statistics, Capital University of Economics & Business; School of Economics and Management, Beihang University; Beijing Institute of Mathematical Sciences & Applications
Summary:
Environmental regulation refers to the policies, regulations and strategic measures taken by a country to limit or eliminate pollution for the purpose of environmental protection. It is a method for the government to solve the “market failure” of environmental problems. From the scientific outlook on development to the strategic deployment of the two-carbon goal, the intensity of China's environmental regulation continues to increase. Data from the Ministry of Ecology and Environment of the People's Republic of China show that more than 119 new or revised environmental pollution control standards have been issued since 2010. In January 2015, the New Environmental Protection Law was implemented. At the end of 2017, China launched carbon emissions trading. On January 1, 2018, the environmental protection tax was officially levied. In March 2018, the Ministry of Ecology and Environment of the People's Republic of China was established to promote environmental protection and climate change policies. In 2020, the Central Economic Work Conference listed “carbon peak and carbon neutral” as a key task, and the scope of environmental regulation was further expanded from heavily polluting industries to industries with high energy consumption and high emissions. At the same time, it is also supplemented by special actions such as environmental protection management, special supervision,to promote the implementation of policies.Therefore, system design, comprehensive deployment and continuous strengthening of environmental regulation have become an inevitable trend. In the financial sector, central banks and financial institutions have also reached a consensus: environmental and climate risks will lead to financial risks, and financial institutions must strengthen environmental and climate risk supervision. In 2017, eight regulatory departments, including the People's Bank of China, jointly initiated the establishment of the Central Banks and Supervisors Network for Greening the Financial System (NGFS), which is dedicated to monitoring and studying the impact of environmental and climate factors on financial risks. In 2019, the organization officially proposed that climate change is the source of financial risks. China's bond market has experienced frequent defaults in recent years.Are environmental regulations a cause of the subsequent defaults in the bond market？ If so, what are the mechanisms that trigger default risk？ Is there a viable solution？ The impact of environmental regulations on default risk has not been discussed deeply. Green technology innovation plays an important role in the transmission process of environmental regulation to default risk. On the one hand, green technology innovation, like ordinary innovation, helps to improve product competitiveness and build competition barriers, thereby increasing enterprise value. It also helps to obtain external financing, thus reducing default risk. On the other hand, green technology innovation is a special technological innovation with environmental protection as an important goal, which may play an important role in the default risk caused by environmental regulations. Based on bond default events, environmental policy stringency (EPS) index data proposed by OECD, and green patent data samples, this paper establishes a zero-inflation Poisson model to test the impact of environmental regulations on bond default risk and analyzes the risk inhibition effect of green technology innovation. The mechanism of the above influence is further explored from the perspective of cash holding and financing cost by a fixed effects model. The innovations of this paper are as follows: First, environmental regulation is included in the study of determinants of default risk. With a forward-looking perspective, this study enriches the understanding of bond default factors analysis, provides a basis for government policy prediction and policy formulation, and gives an important reference for enterprises and financial institutions to effectively prevent bond default risk. Second, from the perspective of cash depletion and financing cost, it reveals the channels through which environmental regulations affect default risk. Third, we test the risk inhibition effect of green technology innovation to provide strategic guidance for enterprises to cope with the upgrading of environmental regulations and to provide risk prediction guidance for bond market investors. The research shows that environmental regulations increase cash depletion and financing costs of enterprises, thus increasing the default risk of debt-issuing enterprises. Green technology innovation has an important risk inhibition effect. In the process of environmental regulation upgrading, enterprises with green technology innovation have a lower default risk. After the enhancement of environmental regulations, green technology innovation can help alleviate the decline in net cash flow and the increase in financing costs. In this case, enterprises have more cash flow and lower bound premiums, which leads to a lower default risk. The research findings in this paper have important policy implications for promoting green transformation, achieving high-quality development of “dual carbon” strategic goals, and deepening green finance. First, the bond approval department should pay more attention to the assessment of enterprises' environmental protection input before the bond issuance. It should strengthen the review and approval process of environmental impact assessments, conduct evaluations of green technologies. Second, bond issuers should strengthen green technology innovation, convert innovation into green and low-carbon productivity, invest in green technology from the perspective of dual-carbon goals, and continuously enhance technology to meet the requirements of green and low-carbon development.
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