ESG equity or green credit: Financing strategies for green transformation in the supply chain under consumption subsidies

Abstract

We consider a supply chain with a capital-constrained supplier and a manufacturer, where the supplier seeks funding for green transformation. We develop an ESG Equity Financing (EEF) model that incorporates dividend ratios based on ESG valuation, reflecting both the supplier's financial and ESG performance. In addition to the EEF offered by the manufacturer, the supplier can opt for traditional Green Credit Financing (GCF) from banks. Under government subsidies for consumers buying green transformation products, we explore pricing strategies under different financing models and examine how subsidies impact green transformation, value creation, and financing equilibrium in the supply chain. We also compare the sustainability of EEF and GCF in driving green transformation. Our analysis reveals that consumption subsidies may not incentivize suppliers to increase green investments. In pricing strategies, GCF encourages both the supplier and manufacturer to raise prices, while EEF can lead the manufacturer to lower prices. Regarding financing equilibrium, the supplier's carbon emissions profile and subsidy rate significantly affect the balance between the two financing options. Interestingly, a higher degree of product greenness does not always result in lower overall carbon emissions. Most importantly, EEF has the potential to be the only financing strategy that creates a win-win outcome for the supply chain, consumers, and societal welfare. With suitable government interventions, particularly in setting consumption subsidies, EEF can emerge as the preferred financing option, facilitating green transformation and benefiting all stakeholders.