Environmental regulation and ESG of SMEs in China: Porter hypothesis re-tested

Abstract

We examined the policy impact on the environmental and economic performance of small and medium enterprises (SMEs), which is understudied in the literature. Using the Chinese National Private Firm Biannual Survey data from 2006 to 2014 for empirical testing, we found evidence for the positive effects of environmental regulation on firm environmental investment (weak Porter hypothesis) and predictive power of environmental, social, and governance (ESG) factors for firm profitability. Particularly, resources allocated for fulfilling social responsibilities (both internal and external) contribute to firm profitability, and firm owners/managers' membership with the Federation of Industry and Commerce and involvement in firm decision-making both are profit-enhancing but hindering environmental investment. Besides offering a large-N evaluative study of regulatory impact on SMEs, the results can also inform regulators and/or investors of screening strategies in engaging SMEs in sustainability transition, which has implications for both the success of the regulatory regime and the advancement of environmental and social wellbeing.