Green Loans and Green Innovations: Evidence from China’s Equator Principles Banks

Round 1

Reviewer 1 Report

This paper examines a very timely subject on Green finance and ESG framework implementation based on China's Equator Principles banks. The authors using data taken from the A-share market in China from 2008 to 2018 examine the influence of new loans from EP banks on the green innovations of debt enterprises based on the theoretical framework of stakeholders. The main results show that the supply of new loans from EP banks are the main contributors to the green innovation of debt firms. A battery of robustness tests show that he baseline are maintained.

The paper is well written and well-structured and provides several new findings on the relationship between green loans and green innovations.

I have some minor comments

1. In the introduction should add a paragraph to explain how the present paper is placed within the relevant literature in a more coherent way.

2. Throughout the manuscript the authors used the numbering of the reference list. This makes hard to the reader to follow the arguments. I suggest that the names of the authors and not the number of its reference in the text.

 

 

 

 

 

Author Response

RESPONSE TO REFEREE 1

 

Title of Manuscript: " Green Loans and Green Innovations: Evidence from China’s Equator Principles Banks"

 

Manuscript ID: sustainability-1970302

 

Date of Response: 17 October 2022

 

Dear reviewer，

 

When receiving your comments and suggestions, we felt very gratified and happy, and thank you for your affirmation of our topic. You carefully reviewed our manuscript from Title to Conclusion. It can be seen that you are a scholar with deep professional quality and extremely rigorous and serious about academics. Your rigorous and serious academic attitude is worth learning. We have attempted to address each of the concerns you raised and have incorporated as many of your suggestions as possible in the revised version of the paper. In this note, we highlight how your concerns have been incorporated into the current manuscript. For ease of exposition, your comments appear in italics below and are followed by our responses.

 

Point 1: In the introduction should add a paragraph to explain how the present paper is placed within the relevant literature in a more coherent way.

 

RESPONSE:

Thank you for your suggestion. In order to explain how the present paper is placed within the relevant literature in a more coherent way, we have sorted out and analyzed the existing Equator Principles related literature, and added this section to the introduction:

 

“Since the advent of the Equator Principles in 2003, the Equator Principles Association has continuously revised and updated the Equator Principles. Broadly, there are two main streams of literature in line with Equator Principles. First, a large body of work from the evolution and its functions of the Equator Principles (Lawrence and Thomas, 2004; O'Sullivan and O'Dwyer, 2015; Finger et al., 2018), demonstrating that banks that adopt the Equator Principles take more consideration into social, ethical and environmental policies (Finger et al., 2018; Martens et al., 2019; Alshebami, 2022). Second, numerous studies from the perspective of financial institutions focus on the adopting Equator Principles driven factors (Scholtens and Dam, 2007; Contreras et al., 2019) and economic consequences (Eisenbach et al., 2014; Chen et al., 2018). Chen et al. (2018) proved that banks adopting the Equator Principle have higher liquidity and positive returns, which supports the reputational risk hypothesis. The correlational studies conducted so far support Equator Principles, however, few studies have focused on the banks that have adopted the Equator Principles (Equator Principles banks) as creditor, and their involvement in the governance of debt companies.”

 

 

Table: The list of existing studies on Equator Principles banks

Serial Number	Reference
1	Macve, R., & Chen, X. (2010). The “equator principles”: a success for voluntary codes? Accounting, Auditing & Accountability Journal.
2	O’Sullivan, N., & O’Dwyer, B. (2015). The structuration of issue-based fields: Social accountability, social movements and the Equator Principles issue-based field. Accounting, Organizations and Society, 43, 33-55.
3	Eisenbach, S., Schiereck, D., Trillig, J., & von Flotow, P. (2014). Sustainable project finance, the adoption of the equator principles and shareholder value effects. Business Strategy and the Environment, 23(6), 375-394.
4	Wright, C. (2012). Global banks, the environment, and human rights: The impact of the Equator Principles on lending policies and practices. Global Environmental Politics, 12(1), 56-77.
5	Goetz, A. (2013). Private governance and land grabbing: The Equator principles and the Roundtable on Sustainable Biofuels. Globalizations, 10(1), 199-204.
6	Mörth, U. (2014). Organizational legitimation in the age of governing by numbers: The case of regulatory partnerships on ESG issues and financial decisions. Globalizations, 11(3), 369-384.
7	Chen, N., Huang, H. H., & Lin, C. H. (2018). Equator principles and bank liquidity. International Review of Economics & Finance, 55, 185-202.
8	Martens, W., van der Linden, B., & Wörsdörfer, M. (2019). How to assess the democratic qualities of a multi-stakeholder initiative from a Habermasian perspective? Deliberative democracy and the Equator Principles framework. Journal of Business Ethics, 155(4), 1115-1133.
9	Finger, M., Gavious, I., & Manos, R. (2018). Environmental risk management and financial performance in the banking industry: A cross-country comparison. Journal of International Financial Markets, Institutions and Money, 52, 240-261.
10	Conley, J. M., & Williams, C. A. (2011). Global banks as global sustainability regulators?: The equator principles. Law & Policy, 33(4), 542-575.
11	Tseng, Y. C., Lee, Y. M., & Liao, S. J. (2017). An integrated assessment framework of offshore wind power projects applying equator principles and social life cycle assessment. Sustainability, 9(10), 1822.
12	Scholtens, B., & Dam, L. (2007). Banking on the equator. Are banks that adopted the equator principles different from non-adopters?. World Development, 35(8), 1307-1328.
13	Contreras, G., Bos, J. W., & Kleimeier, S. (2019). Self-regulation in sustainable finance: The adoption of the Equator Principles. World Development, 122, 306-324.
14	Lawrence, R. F., & Thomas, W. L. (2004). The Equator Principles and project finance: sustainability in practice?. Natural Resources & Environment, 19(2), 20-26.
15	Alshebami, A. S. (2021). Evaluating the relevance of green banking practices on Saudi Banks’ green image: The mediating effect of employees’ green behaviour. Journal of Banking Regulation, 22(4), 275-286.

 

Point 2: Throughout the manuscript the authors used the numbering of the reference list. This makes hard to the reader to follow the arguments. I suggest that the names of the authors and not the number of its reference in the text.

 

RESPONSE:

Thank you for your suggestion. In our previous edition, we used the numbering of the reference list according to the requirements of the journal. In the revised paper, we have included the author's name in the text for the convenience of reading.

Author Response File: Author Response.docx

Reviewer 2 Report

Thank you very much for the chance to review the article, this article is interesting, please note the following:

Please shorten the abstract with more focus on objective, tool of analysis and findings. Do not confuse the reader with many details in the abstract. It is called an abstract.

 

You wrote, this paper is the first to explore how Equator Principles banks affect corporate green performance. This might not be true as there might be many other authors working at this moment. Please correct it.

 

Please focus more deeply on the research problem in the introduction section.

 

Please separate the theoretical foundation from the literature review. You should have two sections.

 

Please develop your hypothesis under every section of the literature review, you canot have a research without any hypotheses.

 

Please include the following studies, they are related to the research topic:

 

 

Research on the Green Technology Innovation Cultivation Path of Manufacturing Enterprises under the Regulation of Environmental Protection Tax Law in China

 

Evaluating the relevance of green banking practices on Saudi Banks’ green image: The mediating effect of employees’ green behaviour

 

The role of green supply chain management in predicting Indonesian firms’ performance: Competitive advantage and board size influence

 

Please have a pictorial representation for the model of the study.

Please have a separate section for the implications of the study.

Please show limitations of the study and future research.

 

 

 

Author Response

RESPONSE TO REFEREE 2

 

Title of Manuscript: " Green Loans and Green Innovations: Evidence from China’s Equator Principles Banks"

 

Manuscript ID: sustainability-1970302

 

Date of Response: 17 October 2022

 

Dear reviewer，

 

在收到您的意见和建议时，我们感到非常满意和高兴，并感谢您对我们主题的肯定。您仔细审查了我们从标题到结论的手稿。可以看出，你是一个具有深厚专业素质的学者，对学术极为严谨和认真。你严谨认真的学术态度值得学习。我们已尽力解决你提出的每一个问题，并已将尽可能多的建议纳入该文件的修订版。在本说明中，我们重点介绍您的关注点是如何被纳入当前稿件的。为了便于解释，您的评论在下面以斜体显示，然后是我们的回复。

 

第1点：请缩短摘要，更多地关注客观性、分析工具和结论。不要将读者与摘要中的许多细节混淆。它被称为摘要。

 

响应：

感谢您的建议。我们通过缩短摘要来修订摘要，以突出研究目标，方法和发现，并在正文中添加更多细节：

 

摘要：绿色创新对于促进环境保护至关重要，但在很大程度上依赖于银行融资的支持。银行的参与如何促进绿色创新在很大程度上仍未被探索。本研究通过中国A股上市公司的样本，研究了赤道原则银行新贷款对绿色创新的影响。与利益相关者理论的框架一致，我们发现赤道原则银行的新贷款显着促进了借贷公司的绿色创新。进行了几次鲁棒性测试，结论仍然有效。进一步分析表明，借款企业财务约束的缓解和赤道原则银行对企业融资项目的审查共同有助于促进企业绿色创新。异质性测试表明，赤道原则银行的新贷款在污染严重和竞争更激烈的行业以及高管教育水平较高的公司中更有效。总体而言，我们的研究结果表明，利益相关者参与环境治理是改善新兴市场企业绿色创新的重要手段。

 

第2点：你写道，这篇论文是第一篇探讨赤道原则银行如何影响企业绿色绩效的论文。这可能不是真的，因为目前可能还有许多其他作者在工作。请更正。

 

响应：

我们同意您的建议。我们仔细整理了关于赤道原则的现有文献。本文旨在探讨赤道原则银行如何在现有文献的基础上影响企业绿色创新，该文献被表述为第一个探索是不准确的。我们修改了前面的表达式：

 

“本文旨在探讨赤道原则银行如何影响企业绿色创新。

 

表：关于赤道原则银行的现有研究清单

序号	参考
1	麦克夫 （2010）.“赤道原则”：自愿守则的成功？会计，审计和问责制期刊。
2	奥沙利文，北，奥德怀尔，B.（2015）。基于问题的字段的结构：社会责任，社会运动和赤道原则基于问题的领域。会计，组织与社会，43，33-55。
3	艾森巴赫，谢雷克，德里格，J.，冯·弗洛托（2014年）。可持续的项目融资，采用赤道原则和股东价值效应。商业战略与环境，23（6），375-394。
4	赖特， C. （2012）.全球银行、环境和人权：赤道原则对贷款政策和实践的影响。全球环境政治， 12（1）， 56-77.
5	格茨， A. （2013）.私人治理和土地掠夺：赤道原则和可持续生物燃料圆桌会议。全球化， 10（1）， 199-204.
6	默特， U. （2014）.数字治理时代的组织合法性：ESG问题和财务决策的监管伙伴关系案例。全球化， 11（3）， 369-384.
7	陈楠， 黄汉华， 林华华 （2018）.赤道原则和银行流动性。国际经济与金融评论，55，185-202。
8	马滕斯， 范德林登， B.， &沃斯多尔费尔， M. （2019）.如何从哈贝马西亚的角度评估多方利益相关者倡议的民主品质？协商民主和赤道原则框架。商业伦理杂志， 155（4）， 1115-1133.
9	芬格，加维乌斯，I.，马诺斯（2018）。银行业的环境风险管理和财务绩效：跨国比较。国际金融市场，机构和货币杂志，52，240-261。
10	康利，威廉姆斯（2011年）。全球银行作为全球可持续发展监管机构？：赤道原则。法律与政策， 33（4）， 542-575.
11	曾永昌， 李永明， 廖晓明 （2017）.应用赤道原理和社会生命周期评估的海上风电项目综合评估框架。可持续性， 9（10）， 1822.
12	肖尔滕斯，B.，达姆，L.（2007年）。在赤道上银行业务。采用赤道原则的银行与非采用国的银行有何不同？世界发展， 35（8）， 1307-1328.
13	孔特雷拉斯， 博斯， J. W.， & 克莱迈耶， S. （2019）.可持续金融中的自我监管：采用赤道原则。世界发展， 122， 306-324.
14	劳伦斯·托马斯·威廉姆斯（2004年）。赤道原则和项目融资：实践中的可持续性？自然资源与环境， 19（2）， 20-26.
15	Alshebami, A. S. (2021). Evaluating the relevance of green banking practices on Saudi Banks’ green image: The mediating effect of employees’ green behaviour. Journal of Banking Regulation, 22(4), 275-286.

 

Point 3: Please focus more deeply on the research problem in the introduction section.

 

RESPONSE:

Thank you for your suggestion. In order to research the impact of Equator Principles banks on debtor companies more deeply, we have sorted out and analyzed the existing Equator Principles related literature, and added this section to the introduction:

 

“Since the advent of the Equator Principles in 2003, the Equator Principles Association has continuously revised and updated the Equator Principles. Broadly, there are two main streams of literature in line with Equator Principles. First, a large body of work from the evolution and its functions of the Equator Principles (Lawrence and Thomas, 2004; O'Sullivan and O'Dwyer, 2015; Finger et al., 2018), demonstrating that banks that adopt the Equator Principles take more consideration into social, ethical and environmental policies (Finger et al., 2018; Martens et al., 2019; Alshebami, 2022). Second, numerous studies from the perspective of financial institutions focus on the adopting Equator Principles driven factors (Scholtens and Dam, 2007; Contreras et al., 2019) and economic consequences (Eisenbach et al., 2014; Chen et al., 2018). Chen et al. (2018) proved that banks adopting the Equator Principle have higher liquidity and positive returns, which supports the reputational risk hypothesis. The correlational studies conducted so far support Equator Principles, however, few studies have focused on the banks that have adopted the Equator Principles (Equator Principles banks) as creditor, and their involvement in the governance of debt companies.”

 

Point 4: Please separate the theoretical foundation from the literature review. You should have two sections.

 

RESPONSE:

Thank you for your suggestion. We have accepted your suggestion and split the original literature review into two parts: literature review and theoretical analysis, which made our paper more reasonable in structure and clearer in logic:

 

“2. Literature Review and Theoretical Analysis

2.1. Literature Review

2.1.1. Stakeholder Influences on Green Innovations

Stakeholder theory, as developed by Freeman (1984), argues that stakeholder relationships are the foundation of companies. Since then, stakeholder theory has been universally used in corporate governance research (Tran et al., 2020). A firm’s development relies on its stakeholders, and they are closely connected with each other (Flammer and Kacperczyk, 2016; Xu, 2021); thus, stakeholder theory reminds companies that they should fulfil their social responsibilities while achieving corporate objectives. Financial institutions are important enterprise stakeholders: they provide debt capital for the company, support the daily operation of the firm, and obtain interest in-come from the enterprise. Simultaneously, financial institutions concerned about corporate social responsibility and behavior, as well as the environment, can lower their own environmental and social risks (Nguyen, 2022). Due to environmental degradation throughout the world, over the last decade, many firms have turned to green innovations as a means of enhancing their competitive strength (Chang, 2011). A firm’s green innovation tactics are the result of an interaction between stakeholder power and the environmental preferences of management (Banerjee, 2001). Numerous studies have examined the factors affecting a firm’s green innovations under the framework of stakeholder theory (Freeman, 1984; Friedman, 2002).

Consumers and suppliers are important stakeholders in a company; they deter-mine many aspects of the firm’s operations, strategy, etc. (Freeman, 1984), and are an important force to encourage enterprises to take social responsibility and to improve environmental performance (Horbach, 2008; Delmas and Montiel, 2009). According to Van den Berge (2008), consumers can pay a premium or reject companies to urge them to focus on protecting the environment, and this is an important driver of green innovation for companies (Sarkis et al., 2010). Suppliers provide companies with materials and technologies (Kammerer, 2009), enabling them to produce high-quality ecological products in the most efficient way (Zhu et al., 2010) [36] and directly affecting their green production (including products and processes) capabilities, and are therefore crucial to the green innovation potential of companies (Qi et al., 2013) [37]. Novitasari and Alshebami (2021) confirmed that green supply chain management has a positive effect on competitive advantage. As a result, suppliers and consumers have a strong incentive to help companies improve green innovation. In conclusion, numerous studies have confirmed the positive effect of business-related stakeholders on corporate green innovation.

The role of regulatory stakeholders in encouraging corporates to adopt environ-mental management practices cannot be ignored (Darnall, 2009). Companies that fail to meet the requirements of regulators can be punished, fined, charged, or lose their operating license (Sarkis, 2010). Poter and Van der Linder (1995) believe that opportune environmental regulation helps “reversely force” firms to innovate in green technology. Many studies have confirmed that formal environmental regulations have promoted green innovations (Johnstone and Lanonne, 2009; Liu et al., 2021; Chen et al., 2022). However, neoclassical economics believes that environmental regulation increases corporate system compliance costs, as firms are required to cover pollution discharge fees for their pollution behaviors in production activities (Palmer et al., 1995). Due to the pressure on cash flow caused by these fees, managers are pushed to abandon green innovation projects with long time frames and great uncertainty so as to pursue short-term performance (Petroni et al., 2009).

Academia has not reached a consensus about how government environmental regulations affect corporate green innovations. Therefore, determining how to intro-duce other stakeholders into corporate environmental governance is crucial. Creditors provide debt capital for companies, support their production and operation activities, and obtain interest income from them; they are important enterprise stakeholders. Ac-cording to Ghisetti et al. (2015), financial constraints have a negative relationship with investment in green technologies. However, creditors have not been further connected with firms’ green innovations. External financing support is the basic premise of innovation (including green innovation), so it is important to further study the role of creditors in corporate green innovations.

2.1.2. Green Finance and Green Innovations

Green finance has been increasingly noticed by researchers in recent years owing to its potential to solve environmental problems. Compared with general finance pat-terns, green finance is primarily driven by policies and environmental concerns (Zhang et al., 2019). There has been a considerable number of studies conducted on the green financial market. Green finance is meant to reduce environmental pollution as well as lower risk diffusion through the development of diversified financial instruments (Labatt and White, 2002). According to Yu et al. (2021), green finance means providing monetary support, such as green bonds and green stocks, to projects with ecological benefits, such as pollution reduction and energy conservation. Although several definitions of green finance have been generated, at its core, it is a form of financial innovation that promotes a balance between environmental protection and economic growth (Yu et al., 2021).

As the focus and center of China’s green financial system, green credit policies have drawn widespread attention from researchers. Green credit policies primarily leverage the ecological governance role by guiding the flow of funds. Relevant empirical evidence shows that green credit policies can strengthen the green innovation motivation of firms through the incentive and restraint mechanism (Liu et al., 2017; Hu et al., 2021). Specifically, clean corporates find credit financing more accessible and easier to obtain, while polluting corporates confront stricter thresholds and pay more when procuring bank loans (Hu et al., 2021). However, green credit policies are still flawed as they only outline basic Principles without specific management methods. Therefore, banks always lend by industry, and energy-intensive, high-polluting industries that cannot obtain bank credit do not have sufficient funds to improve their production efficiency

(Cao and Leung, 2019), affecting the enthusiasm of these enterprises for industrial up-grading (Mannasoo and Merikull, 2020) and resulting in the improper allocation of capital funds, which goes against the ultimate goal of green credit policies (Wen et al., 2021).

Despite limiting the blind expansion of polluting industries, green credit policies are not conducive to the industrial transformation and upgrading of these industries. Therefore, determining how to guide financial institutions to participate in the specific processes of corporate environmental governance is currently a common concern. Some scholars have presented a green loan theory, demonstrating that green bank loans may incentivize green innovations (Li et al., 2018). Nevertheless, empirical study on the possible correlation between green loans and green innovations is still lacking. Banks are an indispensable part of the financial system in China (Allen et al., 2012), and until now, bank loans have been the major source of external funds for corporates. In 2008, the Industrial Bank announced they would implement the Equator Principles, which was a first in China. The Equator Principles are aimed at providing a universal benchmark for banks to scrutinize, identify, and manage environmental and social risks when providing loans. Therefore, Equator Principles banks provide a good perspective from which to explore the influence of green loans on green innovations.

2.2. Theoretical background and hypothesis development

Many countries have formulated policies to guide the financial institutions that are specifically involved in the process of environmental governance of enterprises (Sun et al., 2019; Zhang et al., 2022). The Equator Principles, as part of these very important policies, are financial industry benchmarks set up by major international financial institutions for assessing and managing the environmental and social risks in pre-financing projects (as shown at www.equator-principles.com accessed on 22 September 2022). The Equator Principles contain a total of ten benchmark principles. Within the universal framework of the Equator Principles, Equator Principles banks will only provide project financing for projects that meet both Principles 1-10 (Scholtens and Dam, 2007; Eisenbach et al., 2014). Among them, Principles 1-3 are related to prior project scrutiny and assessment (Principle 1: Review and Categorisation; Principle 2: Environmental and Social Assessment; Principle 3: Applicable Environmental and Social Standards); Principles 4-6 are related to ongoing project management and supervision (Principle 4: Environmental and Social Management System and Equator Principles Action Plan; Principle 5: Stakeholder Engagement; Principle 6: Grievance Mechanism); Principles 8 is related to remedial measures after the event (Principle 8: Covenants). 

Financial institutions have multiple incentives to adopt the Equator principles and scrutinize financing projects according to their requirements (Eisenbach et al., 2014; Chen et al., 2018; Martens et al., 2019). First, it is conducive to reducing the environ-mental and social risks of banks (Scholtens and Dam, 2007). Second, the brand value of the banks is enhanced. As the benchmark of environmental and social risk management for world-renowned financial institutions, the Equator Principles have immense environmental and social value, and have greatly improved the brand value of the banks that have adopted them (Finger et al., 2018; Alshebami, 2022). Third, it is conducive to improving the international reputation of banks, thereby attracting more inter-national investors (Eisenbach et al., 2014). Therefore, from the perspective of stake-holders, Equator Principles banks have sufficient motivation to conduct a project re-view and evaluation of enterprises (Contreras et al., 2019). They will form a natural environmental regulation force for enterprises, encouraging them to carry out green innovations.

As mentioned above, within the framework of the equatorial principle, Equator Principles Banks scrutiny management processes are required to assess, supervise, monitor, evaluate and report pre-financing projects before, during and after the event (Finger et al., 2018). Above all, Equator Principles banks must assess environmental and social risks of pre-financing projects according to the relevant laws and regulations of the host country (Sarro, 2012). In addition, Equator Principles banks must monitor project operations and the implementation of the action plan (Lawrence and Thomas, 2004; Richardson, 2005). Debt corporates must demonstrate effective stakeholder engagement and establish a complaint mechanism for them to negotiate and resolve is-sues in a timely manner for projects that have a potentially significant adverse impact on affected communities to ensure that debt firms adhere to the environmental and social commitments as set out in the loan agreements (Wright, 2012). Furthermore, for all projects, if the debt corporates fail to meet its environmental and social commitments, Equator Principles Banks will take remedial measures, including declaring an event of default (Hansen, 2006). Therefore, Equator Principles Banks can promote green innovation of lending enterprises through two mechanisms. First, finance constraints limit enterprises' capabilities in green innovation (Andersen,2017; Yu et al.,2021).  The Equator Principles Banks as financial institutions provide loans to enterprises (Chen et al., 2018), alleviate their financing constraints (Li et al., 2020; Xu et al., 2021), and reduce the capital obstacles associated with the green innovations of debt companies (Liu et al., 2017; Hu et al., 2021; Zhou et al., 2021). Second, Equator Principles Banks scrutiny management processes mainly divide into three steps, including before, during and after the event. By assessing and supervising the environmental and social risks associated with pre-financing projects as corporate stakeholders, monitoring project operations and the implementation of the action plan, evaluating and reporting by Equator Principles Banks publicly at least annually. Equator Principles banks’ environmental scrutiny run through the case can produce the environmental governance effect on debt company.

Based on the above analysis, we proposed the following research hypothesis:

Hypothesis 1. New loans from Equator Principles banks can promote the green innovations of debt enterprises.

 

Point 5: Please develop your hypothesis under every section of the literature review, you cannot have a research without any hypotheses.

 

RESPONSE:

Thank you for your suggestion. We have accepted your suggestion and developed our research hypotheses after a literature review and theoretical analysis:

 

“2.2. Theoretical background and hypothesis development

Many countries have formulated policies to guide the financial institutions that are specifically involved in the process of environmental governance of enterprises (Sun et al., 2019; Zhang et al., 2022). The Equator Principles, as part of these very important policies, are financial industry benchmarks set up by major international financial institutions for assessing and managing the environmental and social risks in pre-financing projects (as shown at www.equator-principles.com accessed on 22 September 2022). The Equator Principles contain a total of ten benchmark principles. Within the universal framework of the Equator Principles, Equator Principles banks will only provide project financing for projects that meet both Principles 1-10 (Scholtens and Dam, 2007; Eisenbach et al., 2014). Among them, Principles 1-3 are related to prior project scrutiny and assessment (Principle 1: Review and Categorisation; Principle 2: Environmental and Social Assessment; Principle 3: Applicable Environmental and Social Standards); Principles 4-6 are related to ongoing project management and supervision (Principle 4: Environmental and Social Management System and Equator Principles Action Plan; Principle 5: Stakeholder Engagement; Principle 6: Grievance Mechanism); Principles 8 is related to remedial measures after the event (Principle 8: Covenants). 

Financial institutions have multiple incentives to adopt the Equator principles and scrutinize financing projects according to their requirements (Eisenbach et al., 2014; Chen et al., 2018; Martens et al., 2019). First, it is conducive to reducing the environ-mental and social risks of banks (Scholtens and Dam, 2007). Second, the brand value of the banks is enhanced. As the benchmark of environmental and social risk management for world-renowned financial institutions, the Equator Principles have immense environmental and social value, and have greatly improved the brand value of the banks that have adopted them (Finger et al., 2018; Alshebami, 2022). Third, it is conducive to improving the international reputation of banks, thereby attracting more inter-national investors (Eisenbach et al., 2014). Therefore, from the perspective of stake-holders, Equator Principles banks have sufficient motivation to conduct a project re-view and evaluation of enterprises (Contreras et al., 2019). They will form a natural environmental regulation force for enterprises, encouraging them to carry out green innovations.

As mentioned above, within the framework of the equatorial principle, Equator Principles Banks scrutiny management processes are required to assess, supervise, monitor, evaluate and report pre-financing projects before, during and after the event (Finger et al., 2018). Above all, Equator Principles banks must assess environmental and social risks of pre-financing projects according to the relevant laws and regulations of the host country (Sarro, 2012). In addition, Equator Principles banks must monitor project operations and the implementation of the action plan (Lawrence and Thomas, 2004; Richardson, 2005). Debt corporates must demonstrate effective stakeholder engagement and establish a complaint mechanism for them to negotiate and resolve is-sues in a timely manner for projects that have a potentially significant adverse impact on affected communities to ensure that debt firms adhere to the environmental and social commitments as set out in the loan agreements (Wright, 2012). Furthermore, for all projects, if the debt corporates fail to meet its environmental and social commitments, Equator Principles Banks will take remedial measures, including declaring an event of default (Hansen, 2006). Therefore, Equator Principles Banks can promote green innovation of lending enterprises through two mechanisms. First, finance constraints limit enterprises' capabilities in green innovation (Andersen,2017; Yu et al.,2021).  The Equator Principles Banks as financial institutions provide loans to enterprises (Chen et al., 2018), alleviate their financing constraints (Li et al., 2020; Xu et al., 2021), and reduce the capital obstacles associated with the green innovations of debt companies (Liu et al., 2017; Hu et al., 2021; Zhou et al., 2021). Second, Equator Principles Banks scrutiny management processes mainly divide into three steps, including before, during and after the event. By assessing and supervising the environmental and social risks associated with pre-financing projects as corporate stakeholders, monitoring project operations and the implementation of the action plan, evaluating and reporting by Equator Principles Banks publicly at least annually. Equator Principles banks’ environmental scrutiny run through the case can produce the environmental governance effect on debt company.

Based on the above analysis, we proposed the following research hypothesis:

Hypothesis 1. New loans from Equator Principles banks can promote the green innovations of debt enterprises.”

 

 

References

Sun, J.; Wang, F., Yin, H., Zhang, B. Money talks: The environmental impact of China’s green credit policy.  Policy Anal. Manag. 2019, 38, 653–680.

Zhang M, Zhang X, Song Y, et al. Exploring the impact of green credit policies on corporate financing costs based on the data of Chinese A-share listed companies from 2008 to 2019. J. Clean. Prod. 2022, 134012.

Eisenbach, S., Schiereck, D., Trillig, J., von Flotow, P. Sustainable project finance, the adoption of the equator principles and shareholder value effects. Business Strategy and the Environment. 2014, 23, 375-394.

Chen, N., Huang, H. H., Lin, C. H. Equator principles and bank liquidity. International Review of Economics & Finance. 2018, 55, 185-202.

Martens, W., van der Linden, B., Wörsdörfer, M. How to assess the democratic qualities of a multi-stakeholder initiative from a Habermasian perspective? Deliberative democracy and the Equator Principles framework. J. Bus. Ethics. 2019, 155, 1115-1133.

Scholtens, B., & Dam, L. Banking on the equator. Are banks that adopted the equator principles different from non-adopters? World. Dev. 2007, 35, 1307-1328.

Finger, M., Gavious, I., & Manos, R. Environmental risk management and financial performance in the banking industry: A cross-country comparison. Journal of International Financial Markets, Institutions and Money. 2018. 52, 240-261.

Alshebami A S. Evaluating the relevance of green banking practices on Saudi Banks’ green image: The mediating effect of employees’ green behaviour. J. Bank. Regul. 2021, 22, 275-286.

Contreras, G.; Bos, J.W.; Kleimeier, S. Self-regulation in sustainable finance: The adoption of the Equator Principles. World Dev. 2019. 122, 306–324.

Sarro D. Do lenders make effective regulators? An assessment of the equator principles on project finance. German Law Journal. 2012, 13, 1525-1558.

Lawrence R F, Thomas W L. The Equator Principles and project finance: sustainability in practice?. Natural Re-sources & Environment. 2004, 19, 20-26.

Richardson B J. The Equator Principles: The voluntary approach to environmentally sustainable finance. European Energy and Environmental Law Review. 2005, 14.

Wright, C. Global banks, the environment, and human rights: The impact of the Equator Principles on lending policies and practices. Global Environmental Politics. 2012, 12, 56-77.

Hansen R C. The impact of the equator principles on lender liability: risks of responsible lending. Available at SSRN 948228. 2006.

Andersen D C. Do credit constraints favor dirty production? Theory and plant-level evidence. Journal of Environ-mental Economics and Management. 2017, 84, 189-208.

Yu C H, Wu X, Zhang D, et al. Demand for green finance: Resolving financing constraints on green innovation in China. Energy Policy. 2021, 153, 112255.

Li, J., Shan, Y., Tian, G. and Hao, X. Labor cost, government intervention, and corporate innovation: Evidence from China. Journal of Corporate Finance, 2020, 64, 101668.

Xu, S., Tang, H., & Lin, Z. Inventory and ordering decisions in dual-channel supply chains involving free riding and consumer switching behavior with supply chain financing. Complexity. 2021.

Liu, J.Y., Xia, Y., Fan, Y., Lin, S.M., Wu, J. Assessment of a green credit policy aimed at energy-intensive industries in China based on a financial CGE model. J. Clean. Prod. 2017, 163, 293–302.

Hu, G., Wang, X., Wang, Y. Can the green credit policy stimulate green innovation in heavily polluting enterprises? Evidence from a quasi-natural experiment in China. Energy Econ. 2021, 98, 105134.

Zhou, D., Bai, M., Liang, X., Qin, Y. The Early‐life Political Event Experience of the Chair of the Board and the Firm's Innovation Decision. Australian Accounting Review. 2021, 31, 186-212.

 

 

 

 

Point 6: Please include the following studies, they are related to the research topic:

Research on the Green Technology Innovation Cultivation Path of Manufacturing Enterprises under the Regulation of Environmental Protection Tax Law in China

 

Evaluating the relevance of green banking practices on Saudi Banks’ green image: The mediating effect of employees’ green behaviour

 

The role of green supply chain management in predicting Indonesian firms’ performance: Competitive advantage and board size influence

 

RESPONSE:

Thank you for providing us with the latest relevant literature. We have carefully studied these three papers, they are very helpful to our paper writing, and we have included them in the proper and prominent place in the main text.

 

Point 7: Please have a pictorial representation for the model of the study.

 

RESPONSE:

Thank you for your suggestion. We have added a graphic of the theoretical model to the paper, which facilitates a clear presentation of our research topic:

 

 

Figure: Theoretical model

 

Point 8: Please have a separate section for the implications of the study.

Please show limitations of the study and future research.

 

RESPONSE:

Thank you for your suggestion. In the revised paper, we follow your suggestions, and have a separate section for the implications. In addition, we have added a sixth chapter to show limitations of the study and future research:

 

“5. Conclusions and Suggestions

As environmental protection has become increasingly important worldwide, various countries have adopted different policy and procedure measures to improve environmental quality and energy efficiency. Green innovation, as a key factor in environ-mental governance, is vitally important. In both the academic and practical worlds, green innovation is highly regarded for its driving factors. It has been established in the literature that environmental regulations can be a tool to encourage enterprises to be involved in green innovations (Yang et al., 2012). However, some scholars contend that environmental regulations that are too strict are now a barrier to economic development. Given that financial institutions directly affect a firm’s access to capital, we used China’s “Equator Principles bank” loans as a unique scenario and explored how green loans affect the green innovations of firms. We used the stakeholder theory framework as a basis to analyze firms listed on the A-share market in China from 2008 to 2018, coming to the following conclusions.

First, new loans from Equator Principles banks to enterprises significantly con-tributed to the green innovations of enterprises. This evidence indicates the power of stakeholders who implement green management effectively, driving the green innovation intentions of affiliated enterprises.

Second, financial constraints do not tell the whole story regarding financial institution involvement in the environmental governance of debt companies. Scrutiny of corporate financing projects by Equator Principles banks contributes to the promotion of corporate green innovations through green governance effects, and is a substitute for formal government environmental regulation. This finding suggests that powerful stakeholders should pay more attention to, and be involved in, the project decisions of affiliated companies.

Third, the green innovations of enterprises in heavily polluting industries have increased significantly, and these enterprises faced more financial constraints after the issuance of the green guidance policy. Considering this evidence, compared with a one-size-fits-all policy, stakeholder engagement can help companies achieve a green transition.

Fourth, there has been a significant increase in green innovations by firms managed by senior executives with higher education. Based on these findings, it seems that green innovations need to be strengthened in terms of environmental awareness education.

Fifth, firms in competitive industries significantly promote green innovations as they are inclined to strive to obtain a competitive advantage through green development.

6. Research Limitation and Future Research

Despite we explored some new findings on Equator Principles banks' impact on green innovation, the sample is limited to Chinese firms. Due to the differences in financial market structures, institutional environments, etc., between countries, other countries may not be able to apply these findings directly. In the future, data from other countries will provide scholars, business managers, and policymakers with new ideas regarding environmental governance and green innovation.

未来的研究应考虑赤道原则对债务公司环境绩效的潜在影响。绿色创新虽然对可持续发展意义重大，但其他类型的企业环境绩效也是可持续发展中至关重要的地位，如绿色并购、绿色投资等。同时，未来的建筑准实验设计可能有助于更详细地研究赤道原则金融机构与债务公司环境绩效之间的偶然关系。

 

 

 

Author Response File: Author Response.docx

Round 2

Reviewer 2 Report

satisfied