ESG strategic choices under product innovation financing

Green financial institutions identify firms with sustainable development capabilities through ESG preferential loan policies and alleviate the financing constraints faced by firms in innovation. Consequently, firms strategically engage in ESG with the motive of exploiting preferential interest rate differentials, i.e., ESG arbitrage behavior. This study constructs a Stackelberg game model involving manufacturers, retailers, and banks, categorizing manufacturers' ESG strategies into non-ESG, fully-ESG, and ESG-arbitrage based on the ESG rating system, and reveals the influential mechanisms of ESG strategy choices on supply chain performance. The findings reveal: (1) The profitability of ESG-arbitrage strategy depends on the interaction between product innovation levels, carbon emissions, and interest rates; (2) The ESG-arbitrage strategy, while systematically infringing on retailer and bank profits, also has a bright side, it can generate an innovation leverage effect, enabling firms to achieve higher innovation levels with lower investments; (3) In the extension model, we validate the effectiveness of bank digital regulation in curbing manufacturers' ESG arbitrage through a dual-mechanism (promoting the product innovation level and tightening the arbitrage interest rate). This study firstly proposes and systematically argues for ESG arbitrage as a new type of corporate strategic behavior, providing more precise theoretical guidance for firms' ESG strategy formulation, financing decision optimization, and innovation investment allocation, and offering a new "incentive-regulation" collaborative governance paradigm for green finance policy optimization.