From policy to practice: How China's emissions trading scheme shapes ESG greenwashing at the firm level?

This study provides new insights into the causal relationship between implementing Emission Trading Schemes (ETS) and corporate behaviors related to Environmental, Social, and Governance (ESG) greenwashing from 2009 to 2022. Utilizing a concise empirical framework, our findings substantiate the catalytic role of China's ETS in reducing ESG greenwashing activities. However, the effectiveness of this mitigation varies depending on firm's size, governance quality, and pollution nature. Notably, the impact of the ETS also differs based on cohort, calendar times, and exposure duration. Furthermore, our analysis explores the complex mechanisms through which ETS influences ESG greenwashing across four key dimensions, revealing that factors like innovation (including R&D and green innovation) and supply chain dynamics enhance the scheme's ability to curb greenwashing. Conversely, financial constraints and the digital divide can undermine the effectiveness of China's ETS, potentially leading to increased greenwashing practices.