When finance drives innovation: knowledge management challenges in green finance and carbon reduction

Abstract

Green finance is increasingly recognized as a key instrument in climate governance; however, limited research examines its effects from the perspectives of financial flows and technological advancement. This study aims to investigate the impact of green finance on carbon emissions and explores its underlying knowledge management challenges and mechanisms within the Chinese context. This study treats the implementation of China’s green finance reform and innovation policies as a quasi-natural experiment. Using city- and firm-level panel data from 2009 to 2020, a difference-in-differences (DID) approach is used to estimate the impact of green finance on urban carbon emissions and to identify the mediating mechanisms. The results show that green finance significantly reduces urban carbon emissions. The effect is more pronounced in regions with more developed financial systems and stricter environmental regulations. Mechanism analysis reveals that green finance promotes carbon reduction primarily by increasing green investment and stimulating green technological innovation. However, it simultaneously leads to a decline in the quality of green technological innovation, indicating a mismatch between the scale and substantive effectiveness of sustainability-oriented knowledge management and innovation. Furthermore, green finance reduces emissions in both capital-intensive and non-capital-intensive industries, suggesting significant cross-industry spillover effects. The findings provide empirical evidence on the dual effects of green finance on innovation quantity and quality, contributing to the literature on sustainable finance and technological change. Future research could further explore long-term innovation quality dynamics. This study offers important policy insights for developing countries seeking to maximize the carbon reduction potential of green finance through improved financial development and regulatory design. By integrating financial flow dynamics and technological innovation mechanisms into the analysis, this study advances understanding of how green finance influences carbon emissions and highlights the structural challenges in aligning innovation scale with innovation quality.