Can inclusive finance curb sustainability regulatory risk for corporations?

This study investigates the interplay between inclusive finance and sustainable regulatory policy in shaping corporate performance. Specifically, we examine the effects of an exogenous environmental regulation shock: the geographic designation of Biodiversity Conservation Priority Areas (BCPAs) in China. Implementing a difference-in-differences (DID) methodology, we find that firms located within BCPAs experience: 1) heightened environmental penalties; 2) intensified regulatory scrutiny; and 3) a contraction in corporate revenue. Amidst increasingly stringent sustainability mandates, we show that financial inclusion serves as a mitigating agent, attenuating adverse policy effects and restoring corporate profitability. The primary mechanism stems from the stimulation of local entrepreneurial activity facilitated by financial inclusion. Further analyses indicate that inclusive finance boosts green innovations and curtails carbon emissions at the firm level. We adopt alternative econometric models to test the robustness of our results. Overall, this paper makes a unique contribution to the literature by explicating how inclusive finance can buffer against adverse externalities of sustainable policy and provides insights for policymakers and corporate managements.