Regulatory enforcement and firm sustainability: Evidence from China's environmental public interest litigation reform

Abstract

China has implemented stringent environmental regulations to reduce pollutant emissions and promote firm sustainability, while limited research has focused on the role of regulatory enforcement practices in achieving these goals. To fill this gap, we leverage the Environmental Public Interest Litigation (EPIL) reform in China as a quasi-natural experiment to investigate its impact on the ESG performance of listed manufacturing firms. Launched in 2015 by the Supreme People's Procuratorate of China, the EPIL reform aimed to address the lack of plaintiffs in environmental courts and curtail the protection of polluting firms by local governments and environmental departments. Our findings show that the EPIL reform significantly improves the ESG performance of manufacturing firms in the pilot cities. Further analysis reveals that this improvement is primarily driven by strengthened direct and indirect environmental regulations. Additionally, the EPIL reform has a more pronounced positive effect on ESG performance for heavily polluting firms, firms in regions with a healthy legal environment, and politically connected firms. Our study underscores the critical importance of regulatory enforcement efficiency in driving firm sustainability in emerging economies.