Xiaoning Cheng of Nanning Normal University and Yiqi Wang of Jilin Province Economic Management Cadre College assembled a panel of all A-share listed companies on the Shanghai and Shenzhen stock exchanges from 2008 to 2023, yielding 83,081 firm-year observations. Corporate Environmental, Social, and Governance performance was scored using the Huazheng ESG rating framework, which is calibrated to the disclosure requirements of China’s capital markets, while financial and governance data came from the CSMAR database and city-level economic indicators from the EPS China City Database. After excluding financial-sector firms, distressed ST and PT companies, and winsorizing all continuous variables at the 1st and 99th percentiles, the researchers deployed a multiple-period difference-in-differences design built around a single interaction term: what happens to a firm’s ESG score when its city holds both designations simultaneously?

The answer defies the standard assumption of policy synergy. Evaluated alone, the Low-Carbon City pilot substantially lifts corporate ESG performance, with a positive and highly significant coefficient, confirming that focused regulatory pressure genuinely pushes firms to internalize environmental costs. The Smart City pilot, by contrast, shows a positive but statistically insignificant standalone effect, suggesting that digital infrastructure by itself does not automatically drive corporate sustainability. But the interaction term—the condition in which both mandates operate at once—produces a robustly negative coefficient of −0.4227, significant at the 1 percent level. When a municipality is forced to pursue rapid digitalization and rigid decarbonization simultaneously, the concurrent execution of the digital agenda effectively cannibalizes the ESG gains the green policy would otherwise deliver.

The mechanism behind this institutional friction is a financial squeeze. Smart city construction is extraordinarily capital-intensive, and Chinese municipalities, constrained by fiscal decentralization, fund it largely through local government financing vehicles—off-balance-sheet entities that borrow against implicit state guarantees. Because banks treat these government-backed loans as practically risk-free, regional credit flows preferentially to public infrastructure projects, constricting the pool of lending available to private enterprises. The mechanism regressions in the study confirm this directly: the Smart City designation significantly reduces corporate cash ratios, and the dual-policy interaction depletes liquidity even further, with a negative coefficient of −0.0221 that is highly significant. Stripped of cash reserves and cut off from formal credit, firms abandon long-horizon ESG investments—production overhauls, supply chain restructuring, governance reform—in favor of short-term survival.

The theoretical framing draws on multi-tasking agency theory, which holds that when an agent faces competing objectives, effort and resources shift toward tasks that are easily quantifiable, politically visible, and heavily weighted in performance evaluations. In China’s promotion-tournament system, municipal leaders advance their careers by delivering tangible infrastructure. Data centers and broadband networks are visible and fundable; decarbonization is slow and costly. When both mandates arrive at once, local bureaucrats rationally channel credit toward the smart city agenda, and the environmental mandate is left competing for a shrinking pool of private capital. The study’s authors argue this dynamic enriches multi-tasking agency theory by showing precisely how decentralized bureaucracies engineer credit allocations that inadvertently penalize micro-level sustainability.

The burden of this friction falls with striking asymmetry on ownership lines. Splitting the sample by ultimate controller, the researchers find that state-owned enterprises—21,510 firm-year observations—are essentially immune: the interaction effect for the SOE subsample is statistically insignificant. State firms enjoy implicit guarantees, dense political networks, and preferential treatment within the state-dominated banking sector, and many are direct contractors for the very infrastructure projects driving the credit surge. Private enterprises tell a different story. Across 61,571 firm-year observations of non-state-owned companies, the negative interaction effect is pronounced and significant at the 1 percent level. Firms at the periphery of the formal credit market, lacking political capital, are the first to be rationed when local government borrowing surges, and they respond by aggressively curtailing ESG spending to preserve solvency.

The robustness of the finding is unusually thorough for this literature. Because the pilots rolled out in staggered waves, the authors confronted the known biases of two-way fixed effects estimators under staggered treatment timing. A Goodman-Bacon decomposition showed that problematic late-versus-early adopter comparisons carry only 3.8 percent of the estimation weight, and heterogeneity-robust estimators in the style of Callaway and Sant’Anna, together with dynamic event studies, confirmed parallel pre-trends and persistent negative treatment effects. A 1:1 nearest-neighbor propensity score matching procedure with a 0.05 caliper brought the average standardized mean difference across covariates down to 1.93 percent, well inside the conventional 10 percent threshold. Placebo tests that randomly reassigned pilot status 1,000 times produced pseudo-coefficients centered on zero, while the true estimate of −0.4227 sat at the extreme left tail of the distribution. Controlling for contemporaneous policies such as the Broadband China and carbon emissions trading pilots left the interaction effect materially unchanged.

The implications reach well beyond China. The study challenges the compartmentalized evaluation paradigm that dominates policy assessment, in which each program is judged in isolation and assumed to be additive. In reality, municipal governments operate under overlapping directives and hard budget constraints, and the superimposition of well-intentioned mandates can generate parallel administrative requirements, duplicated compliance costs, and conflicting resource demands. When firms face simultaneous pressure from multiple regulatory fronts, the heightened burden may induce symbolic rather than substantive transformation, weakening the very outcomes the policies were designed to achieve. The Chinese case is extreme because of its state-led financial system, but the underlying logic—finite local capacity meeting infinite central ambitions—applies to any jurisdiction stacking digital and green agendas without accounting for their interaction.

The authors propose concrete remedies. Central authorities should dismantle administrative silos and subject future urban pilot programs to mandatory macro-policy compatibility assessments, ensuring that the capital and energy demands of digital infrastructure do not drain the financial and ecological capacity needed for green transitions. Performance evaluation matrices for municipal officials should penalize the monopolization of regional credit by government-backed projects. And because the friction is so sharply asymmetric, targeted interventions in the credit market—ring-fenced green finance quotas and explicit lending protections for private enterprises—are needed to shield non-state firms from liquidity shocks induced by multi-tasking local governance.

The study’s limitations are candidly acknowledged. The sample covers only Chinese A-share listed firms, so generalization to market-based economies, where credit allocation is not dominated by local government financing vehicles, remains untested. ESG scores from the Huazheng framework, while well calibrated to Chinese disclosure rules, are inherently subjective, and alternative rating systems such as Bloomberg or Thomson Reuters could shift the magnitude of the estimated friction. The cash ratio, moreover, is only a proxy for financial constraints; the informal credit rationing negotiated between municipal bureaucrats and local banks remains largely unobservable in standard financial panels. Still, the core result stands as a rigorous baseline for future evaluations of policy coordination: two good policies, deployed without regard for their fiscal collision, can be worse than one.

Subject of Research: Interaction effects of overlapping digital and low-carbon city pilot policies on corporate ESG performance in China

Article Title: Synergistic governance or institutional friction? Joint evidence from digital and green city pilots on corporate ESG performance

Article References: Cheng, X., & Wang, Y. (2026). Synergistic governance or institutional friction? Joint evidence from digital and green city pilots on corporate ESG performance. Frontiers in Environmental Science, 14, Article 1905154. https://doi.org/10.3389/fenvs.2026.1905154

Image Credits: AI Generated

DOI: 10.3389/fenvs.2026.1905154

Keywords: ESG performance, Smart City pilots, Low-Carbon City pilots, policy superimposition, institutional friction, credit crowding-out, difference-in-differences, multi-tasking agency theory, financial constraints, state-owned enterprises, China, environmental policy