Green Finance and Performance of Chinese Commercial Banks: The Role of ESG Indicators and Environmental Innovation

This study examines the strategic role of green finance in improving the financial performance of Chinese commercial banks after 2020. Using a cross-sectional dataset of 128 banks that were actively engaged in green lending, green bond issuance, and environmental innovation between 2020 and 2025, we employed multivariate regression models that controlled for size, leverage, and portfolio-related CO2 emissions. The results show that green credit allocation and environmental innovation have a strong, positive, and statistically significant effect on return on equity (ROE), while higher environmental, social, and governance (ESG) disclosure scores consistently improve profitability by reducing perceived risk and attracting responsible investment. In contrast, corporate social responsibility (CSR) initiatives display a negative short-term effect, reflecting their delayed financial payoffs. Surprisingly, ESG controversies demonstrate a positive association with ROE, highlighting the potential value of proactive crisis management, and market expectations. By integrating environmental innovation and ESG controversies into the green finance–performance nexus, this research advances existing literature and provides policymakers and banking executives with actionable insights. Our findings emphasize that green finance is a strategic tool that can be used to reconcile profitability with sustainability, thereby reinforcing the alignment between financial and climate objectives in emerging economies.