Role of green finance and carbon accounting in achieving sustainability (2024)

The world has encountered a myriad of problems and challenges over time, yet the issue of climate change stands out as one of the most significant challenges humanity has ever faced (National Geographic, 2021; Ye and Rasoulinezhad, 2023). This challenge not only imperils human survival but also disrupts the entire global ecosystem. Consequences of climate change encompass the annual loss of a substantial portion of forest cover, the conversion of arid regions into deserts, rising sea levels, global warming, the extinction of numerous animal and plant species, the prevalence of severe storms and catastrophic floods, and an increased incidence of heart and respiratory ailments. Despite the verbal commitments and expressions of concern from countries regarding climate change, environmental policies aimed at countering these threats are often slow to be put into practice. Particularly following the reduction of the economic downturn induced by the COVID-19 pandemic and the resumption of pre-pandemic levels of economic activity in countries, natural resource depletion, and carbon dioxide emissions have surged (Rasoulinezhad, 2020; Zakari and Khan, 2022; Drews et al., 2022; Liu et al., 2023). Numerous environmental economists, including Garcia et al. (2023) and Zhang et al. (2023), have argued that the most effective solution to mitigate the perils of climate change lies in the attainment of sustainable development goals.

Sustainable development, with its focus on the responsible utilization of natural resources and the preservation of our planet’s ecosystem and biodiversity, serves as the foundation for achieving both present and future economic and social well-being. It is a fundamental concept that holds the key to reducing poverty, eradicating global hunger, harnessing technology, and advancing smart urban planning. Sustainable development encourages the adoption of sustainable energy sources, places emphasis on clean and accessible water sources, and prioritizes the health of people worldwide. The concept of sustainable development was first introduced to the world’s nations at the Earth Summit in 1992 (Yoshino et al., 2021; Vuuren et al., 2022; Zakari et al., 2023). In 2015, the United Nations unveiled 17 sustainable development goals, guiding countries in their quest for a better future and a healthier environment (Guo et al., 2022). Countries have launched diverse programs and policies to align with these 17 goals. However, progress on the path to sustainable development varies from one country to another. Some nations implement sustainable development policies swiftly and systematically, while others face numerous challenges and obstacles, resulting in slower progress. One of the most significant hurdles to achieving sustainable development goals is the availability of capital (Liu et al., 2023). Without sufficient financial resources, countries are unable to undertake the projects necessary for sustainable development (Hafner et al., 2022; Li et al., 2023).

Addressing the issue of inadequate capital can be achieved through the utilization of green financial instruments. Green finance, characterized by transparency and stability, instills confidence in private investors, encouraging their participation in green projects. This, in turn, facilitates the accumulation of green capital and the advancement of sustainable initiatives. Green finance plays a pivotal role in granting private companies easier and more cost-effective access to green financial resources, allowing them to invest in eco-friendly practices through instruments like green loans, green guarantees, green credit, or green bonds. The Climate Bonds Initiative (2022) reports a remarkable milestone in the realm of green finance, with green bonds reaching a record of 522.7 billion US dollars in 2021. The market size of green finance amounted to nearly 3650 billion US dollars in 2021, and projections indicate that it could soar to over 22485 billion US dollars by 2031.

An additional pivotal aspect in the pursuit of sustainability is the carbon accounting of enterprises. For companies, the ability to effectively account for their carbon emissions holds immense significance (Alromaizan et al., 2023). It not only enhances a company’s understanding of the environmental impact of its operations but also contributes to a more transparent and precise determination of the carbon tax imposed by governmental authorities. This transparency in carbon accounting is particularly crucial since it underpins the decisions of environmentally conscious shareholders. Many investors who prioritize eco-friendly practices seek to invest in companies that maintain transparent carbon accounting practices and demonstrate a clear commitment to social and environmental responsibility (Kaur et al., 2022).

The primary objective of this study is to examine the influence of green finance and carbon accounting on the sustainable development of manufacturing companies listed on the Shanghai Stock Exchange in China. The choice of China for this investigation is particularly noteworthy due to its status as the world’s largest emitter of carbon dioxide. China’s economic growth since the 1970s has been heavily reliant on fossil fuel consumption and extensive industrialization. Presently, China is responsible for approximately 30% of global carbon dioxide emissions. Consequently, addressing environmental pollution in China carries significant implications for addressing a substantial portion of the global environmental challenge. Furthermore, it is important to highlight that sustainable development has emerged as a central strategic focus for the Chinese government in recent years. Initiatives such as the commitment to achieving carbon neutrality by 2060 and the goal of reaching peak carbon emissions by 2030 have engendered optimism within the international community regarding the prospects of sustainable development.

This research endeavors to significantly enhance the existing knowledge on sustainable development, green finance, and carbon accounting by calculating a sustainable development index for a group of Chinese-listed companies. By examining the relationships between green finance, carbon accounting, and sustainable development at the company level in China, the study aims to contribute valuable insights to the field. The paper reviews prior literature, outlines theoretical foundations, provides details about data and estimation methods, presents empirical results, and concludes with policy implications and suggestions for further research. Given China’s prominent role as a global carbon dioxide emitter and its recent commitment to sustainable development goals, this research has the potential to shed light on the vital nexus between environmental responsibility, financial strategies, and long-term economic prosperity in the world’s largest carbon-emitting nation.

This section delves into the dimensions of sustainability, green finance, and carbon accounting as explored in prior research.

Several earlier studies have addressed the challenges and prerequisites for achieving sustainability. These studies underscore the need for efficiency regulations, roadmaps, and institutional commitments to sustainability targets, emphasizing the multifaceted nature of sustainability that necessitates collective efforts from enterprises, households, financial institutions, and governments. Researchers have also highlighted the importance of reducing costs in economic markets to realize sustainable growth, where digitalization and internet-based technologies can play a pivotal role in cost reduction. Furthermore, impediments such as fossil fuel dependence, insufficient sustainability literacy, and inadequate financial resources for green projects have been identified as critical obstacles to sustainable development. Motivational factors for sustainability have been explored, with green fiscal policies, green education, social initiatives, and effective waste management emerging as key drivers for encouraging participation in environmentally friendly initiatives.

In addition, a separate body of research has emphasized the instrumental role of green finance in advancing sustainable development objectives. Green financial instruments, such as green loans, green credit, and green bonds, have significantly contributed to enhancing the quality and scope of sustainable projects, promoting technological advancements, and expanding renewables. These studies have also underlined the significance of social awareness, clear regulations, and government incentives in achieving sustainable cities and buildings. Green finance has been recognized as a reliable means to foster green technology adoption, reduce carbon emissions, and drive sustainable economic growth by improving firms’ access to finance and encouraging private investment. Furthermore, researchers have stressed the importance of carbon accounting in promoting sustainability within enterprises, as it allows companies to quantify their carbon emissions and assess their environmental impact. Carbon accounting transparency is essential for the development of green fiscal and monetary policies, facilitating the shift toward greener production, logistics, and organizational structures.

This extensive review of previous literature highlights the significant roles of green finance and carbon accounting in realizing sustainable development goals. However, it’s worth noting that these aspects have not been comprehensively explored in the context of China, representing a literature gap that this research aims to address. To bridge this gap, we investigate the impacts of green finance and carbon accounting on the sustainable development index for selected listed companies in China.

This section delves into the pathways through which green finance and carbon accounting exert their influence on the quality of sustainable development.

The first influential pathway involves enhancing access to green financial resources for economic enterprises, a critical challenge, particularly for micro, small, and medium-sized companies striving to achieve sustainable development objectives. The proliferation of green finance and carbon accounting enhances the transparency of a company’s environmental practices, facilitating validation by financial institutions, enabling access to more affordable green financial resources, and ultimately fostering increased investments in environmentally sustainable business practices.

Furthermore, carbon accounting, in conjunction with financial accounting, enhances the transparency of a company’s financial and environmental performance, subsequently contributing to the improvement of the government’s green taxation system. Governments can institute more effective green tax rates based on a company’s carbon dioxide emissions, effectively incentivizing companies to invest in reducing carbon emissions.

Carbon accounting and the development of green financial markets also play a pivotal role in raising society’s awareness of environmental issues and sustainable development policies. This heightened awareness results in enhanced community literacy about sustainability, which, in turn, drives greater social participation and demand for eco-friendly policies.

Another influential channel for carbon accounting and green financial markets is their role in sustainable development through the reduction of carbon dioxide emissions. By upgrading carbon calculation systems and fostering the growth of green financial markets, enterprises are encouraged to adopt more environmentally friendly practices, leading to decreased carbon emissions. This reduction not only improves overall quality of life but also lowers healthcare costs in society, contributing to increased prosperity.

Moreover, companies equipped with accurate carbon emission data derived from financial accounting and supported by access to green financial resources can strategically plan technological advancements and innovation processes to minimize their environmental footprint. Consequently, the development of green financial instruments and carbon accounting fosters environmental pollution reduction within economic enterprises through green innovation and technological progress, becoming a driving force behind sustainable development.

The central focus of this paper is to examine the implications of the development of green finance and carbon accounting on the sustainability of Chinese manufacturing listed companies in the Shanghai Stock Exchange Market during the period from 2010 to 2020. In total, there are approximately 1600 companies listed on the Shanghai Stock Exchange (SSE) as of 2022, with manufacturing companies comprising the majority (over 1180 companies). For this analysis, we selected a sample of 500 companies based on data availability and their utilization of carbon accounting systems. The sustainability of these selected companies is assessed using a sustainable development index calculated from six indicators (innovation-driven, structure upgrading, resource-intensive, environmental coordination, benefit optimization, and liberalization) following the methodology proposed by Zhang et al. (2021). Additionally, two key explanatory variables are included in the panel data model: the amount of green financing received (as indicated in the financial reports) serving as a proxy for green finance, and the presentation of a carbon accounting report (in the form of a binary dummy variable, 0 or 1). Several control variables, namely ESG (Environmental, Social, and Governance) investing, the number of employees, stock price, and resource consumption (specifically, water and electricity) are incorporated into the empirical model in accordance with the underlying theoretical foundations. Table 1 provides a detailed description of the identified variables.

Anticipations regarding the impact of various factors on the sustainable development index of companies are as follows: Receipt of green facilities is expected to drive advancements in green technology across a company’s production, distribution, and administrative processes, ultimately enhancing its sustainable development index. Employing a carbon accounting system to gain a deeper understanding of a company’s carbon emissions situation is likely to result in more informed decisions by company management, furthering the goals of sustainable development. ESG (Environmental, Social, and Governance) investments made by a company are believed to have a positive effect on its sustainable development index. This is attributed to companies assuming greater responsibility for addressing social, governance, and environmental concerns, alongside their financial and economic performance, which leads to increased participation in social and environmental projects and, consequently, an improved sustainable development index. The number of employees in a company can have both positive and negative effects on the sustainable development index. On one hand, increasing the workforce may lead to higher personnel costs, potentially limiting the company’s ability to invest in eco-friendly initiatives. Conversely, as a company expands, it is expected that its sustainable development index will improve. The effect of the stock price is less clear-cut. A rising stock price typically signifies shareholder demand for the company’s shares, reflecting strong economic performance and profitability. If this profitability is channeled toward sustainable corporate management, it will likely result in an enhanced green growth index. However, if the company doesn’t prioritize eco-friendly initiatives in its performance, the sustainable development index may suffer. An increase in the consumption of electricity and water resources is predicted to have an adverse impact on a company’s sustainable development index. Efficient management of resource consumption, achieved through process improvements, technology adoption, and the promotion of a culture emphasizing responsible water and electricity use, is a fundamental component of corporate-level sustainable development. Consequently, any increase in water and electricity consumption is expected to impede the progress of sustainable development.

Prior to conducting the estimations, the stationarity of the variables is assessed. This is achieved through the application of the Augmented Dickey-Fuller (ADF) test, as introduced by Dickey and Fuller in 1981, and the Kwiatkowski-Phillips-Schmidt-Shin (KPSS) test, as proposed by Kwiatkowski et al. (1992). Subsequently, the co-integration status among the variables is determined by employing the Autoregressive Distributed Lag (ARDL) bounds test, a method introduced by Pesaran et al. (2001). The effects of the independent variables are then quantified using the fully modified ordinary least squares (FMOLS) estimation technique. After conducting the estimations, diagnostic tests are administered to ensure the reliability of the results. Additionally, a robustness test is carried out by altering the dependent variable to validate the consistency of the empirical findings. The progression of the estimation process is presented in Table 2 for reference.

Before estimating the coefficients, it is crucial to assess the stationarity of the series. This is achieved by conducting both the Augmented Dickey-Fuller (ADF) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS) tests. The outcomes, as presented in Tables 3 and 4, indicate that the variables are non-stationary at their initial level; however, they all exhibit stationarity when considering their first differences.

Subsequently, it is valuable to ascertain whether the variables exhibit long-term co-integration. To address this, the ARDL bounds test is employed (as depicted in Table 5), and it affirms that the variables indeed exhibit co-integration.

To assess the effects of the independent variables, the fully modified OLS technique is utilized for the long-term perspective. The estimation results are presented in Table 6 as follows:

The results of estimating the coefficients of the variables reveal several key findings. Firstly, the presence of carbon accounting has a positive impact on the sustainable development index of listed companies in China. When companies are more aware of their carbon dioxide emissions, it leads to better planning by their managers to implement environmentally friendly practices. This finding aligns with previous research by Zhang et al. (2022), Kaur et al. (2022), Alromaizan et al. (2023), and Yu et al. (2023), which have also emphasized the positive effects of carbon accounting on sustainability.

Additionally, receiving green facilities, such as green loans, is a driving factor for improving the sustainable development index of the studied Chinese-listed companies. A 1% increase in green facilities received is associated with a 0.41% improvement in the sustainable development index.

ESG (Environment, Social, and Governance) investment is another influential factor in enhancing the sustainable development index of Chinese-listed companies. ESG investment reflects a company’s commitment to social and environmental responsibilities, attracting environmentally conscious shareholders who are willing to invest in companies with robust ESG practices.

On the other hand, the number of workers in Chinese stock market enterprises has a negative impact on the sustainable development index. A 1% increase in the number of personnel is linked to about a 0.35% reduction in the company’s sustainable development index. This is because an expanded workforce often leads to increased personnel costs and resource consumption. However, if the workforce possesses green skills or expertise in technology and innovation, it can have a positive effect on the company’s sustainable development.

Furthermore, an increase in the stock price has a favorable impact on the sustainable development index. A rising stock price indicates increased demand for the company’s shares, suggesting a healthy state of economic activities and the company’s financial condition. This financial stability provides opportunities for green investments in the company’s internal processes.

Lastly, the consumption of resources, such as water and electricity, is inversely related to the sustainable development of the company. In other words, higher resource consumption is associated with lower levels of sustainable development. This highlights the importance of efficient resource management as a component of sustainable development.

In continuation, the Wald test is employed (Table 7) to check the heteroscedasticity problem in the empirical model. Since the probability is less than 0.05, it can be concluded that the empirical model is appropriate.

Finally, a robustness test was conducted by altering the dependent variable, specifically focusing on R&D (Research and Development) expenditure, to assess the reliability and validity of the empirical estimations. The results are presented in Table 8.

Finally, a robustness test was conducted by altering the dependent variable, specifically focusing on R&D (Research and Development) expenditure, to assess the reliability and validity of the empirical estimations. The results are presented in Table 8.

Promoting sustainability in economic enterprises stands as a crucial facet in the pursuit of sustainable development objectives, given the substantial environmental impact of industrial and production activities in these organizations, primarily through waste production and greenhouse gas emissions. Nonetheless, achieving eco-friendly practices within the realms of production, management, and distribution in economic enterprises is a complex endeavor. This study delves into the impact of carbon accounting and green finance on the sustainable development index within a cohort of 500 Chinese-listed companies over the span of 2010 to 2020. The research findings affirm that the implementation of a carbon accounting system and the integration of green finance mechanisms contribute to a marked enhancement of the sustainable development index in Chinese-listed companies. Carbon accounting provides a transparent overview of a company’s greenhouse gas emissions, enabling better decision-making concerning sustainability goals. Simultaneously, the green financial market broadens these companies’ access to environmentally friendly financial resources, facilitating the transformation of their administrative, production, and distribution processes towards more eco-friendly practices. Furthermore, a closer examination of the impact coefficients of the control variables reveals that the number of personnel and resource consumption (specifically water and electricity) represent significant hindrances to sustainable development in these listed companies in China. A negative coefficient associated with the number of workers underscores a potential deficit in their eco-consciousness, indicating a lack of green skills and innovation in eco-friendly technologies. Additionally, resource consumption, such as water and electricity, reflects resource inefficiency, thereby diminishing the overall sustainability index of the companies

In the realm of practical policymaking, a collaborative effort involving both economic enterprises and the Chinese government is imperative. The central government of China should actively promote the adoption of carbon accounting management systems within companies, potentially by offering incentive packages to encourage their implementation. Simultaneously, the formulation of green financial policies should create an environment that rewards proactive green companies while holding large greenhouse gas-emitting companies accountable. The expansion of the green financial market deserves special attention from the Chinese central government, particularly through the utilization of digital platforms, financial technologies, blockchain, cryptocurrency, big data, and artificial intelligence. The digitalization of the green financial market offers companies the flexibility to access green financial resources from any geographic location and at any time, thus bolstering their commitment to sustainability. It is paramount for listed companies to embrace the principles of sustainable corporate management, ensuring that environmentally conscious solutions are meticulously explored and adopted within the company. Furthermore, prioritizing the standardization of financial reports is essential for securing green financial credit for economic enterprises in China. The current lack of specific reporting standards presents challenges and errors in the validation process by financial institutions and banks when considering green credits. Another pragmatic policy to pursue is the investment of economic enterprises in sustainable electricity production projects. This not only reduces carbon dioxide emissions and resource consumption but also contributes to lowering electricity supply costs for these enterprises

In light of future research directions, it is recommended to explore publicly traded companies across various economic sectors, such as textiles or food. The application of carbon accounting and the green financial market can prove beneficial for companies spanning diverse industries. Additionally, conducting a study on the influence of the COVID-19 pandemic on the relationship between China’s green financial market and sustainable development is a promising avenue for research. Consideration should be given to employing the multi-criteria decision analysis method to assess the perspectives of sustainability experts and the role of stock exchange companies in China. Furthermore, a comparative study could shed light on the differential impacts of carbon accounting and green finance in distinct countries, offering valuable insights for future research endeavors.

Authors and Affiliations

1. School of Finance and Economics, Kaifeng University, 47500, Kaifeng, China

   Juan Wu

Contributions

JW: conceptualization, supervision, resources, writing review and editing; JW: data curation, writing original draft preparation; JW: data curation; JW: resources, writing review and editing, supervision.

Corresponding author

Correspondence to Juan Wu.

Competing interests

The author declares no competing interests.

Ethical approval

Ethical approval was not required as the study did not involve human participants.

Informed consent

This article does not contain any studies with human participants performed by any of the authors.

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