Do Environmental Regulatory Interventions Help Highly Polluting Firms Become Sustainable? Evidence From Quasi‐Natural Experiment‐Based Indian Manufacturing Firms

The study investigated how environmental regulation, specifically India's National Action Plan on Climate Change (NAPCC) and the subsequent Paris Agreement, affects the environmental and financial performance of Indian manufacturing firms. Employing a quasi‐natural experiment approach, the analysis evaluates how these regulations influence compliance costs, access to external financing, and market valuation for highly polluting firms. The results demonstrate that stringent environmental regulations can incentivize firms to adopt sustainable practices through efficiency‐oriented compliance strategies such as process upgradation, leading to reduced abatement expenses and improved access to finance at lower costs. These outcomes provide empirical evidence supporting the weak form of the Porter Hypothesis, showing that well‐designed regulations can stimulate innovation and efficiency gains, even when formal research and development (R&D)–led innovation remains limited. The findings further show that the Paris Agreement amplified these effects, facilitating long‐term value creation and enhancing market legitimacy. Overall, the study contributes to environmental finance and policy discourse by highlighting how national and global environmental frameworks jointly influence firm adaptation, sustainability, and financial resilience.