Abstract:Environmental pollution not only poses a threat to the ecological security of sustainable human development, but also may evolve into one or more economic risks through the economic behavior of micro-entities. Ecological risks and economic risks are intrinsically linked, yet the existing literature lacks in-depth studies on the evolutionary effects and pathways of both, especially the empirical evidence. In this paper, we select haze pollution, which is more prevalent and visible among ecological risks, and financial risks, which are most likely to trigger economic crises, to explore the evolutionary paths of financial risks from haze pollution. Firstly, the increase in regional haze pollution will worsen the production and operation status of enterprises, but this impact will not be reflected in the explicit indicators of enterprise business performance in the short term. Then, the increase in production and operation risks will drive the increase of enterprises’ financing demand. Due to the asymmetry of information and the hidden nature of enterprise operation risks caused by haze pollution, financial institutions tend to adopt a “weak control” strategy in the face of this increase in borrowing demand, resulting in a significant increase in enterprises’ debt scale and debt service pressure (especially short-term liabilities). At the same time, the deterioration of the actual production and operation conditions reduces the cash flow and collateral value of enterprises, resulting in weakened debt servicing ability of enterprises. In turn, the credit default risk of enterprises increases under the dual effect of increased debt servicing pressure and weakened debt servicing capacity. Further, the continuous increase of haze pollution areas and pollution levels will expose more and more enterprises to greater credit default risk, which may then evolve into systemic financial risk. The empirical analysis uses data related to China’s industrial firms and county PM2.5 concentrations and weather data from 1998 to 2015, with the atmospheric inverse temperature difference as an instrumental variable. The analysis finds that an increase in regional PM2.5 concentration causes a decrease in labor productivity and an increase in labor costs and selling expenses, but has a non-significant effect on sales and profitability, and decreases main business income and total fixed assets while increasing total corporate debt, current liabilities, current liability ratio, interest expenses, and financial expenses, indicating that increased haze pollution can produce financial risk evolutionary effects through the path of increasing corporate debt service pressure and weakening corporate debt service capacity. Further analysis finds that the financial risk evolution effect of haze pollution is no longer significant after the implementation of the “new standard” in 2012, indicating that increasing the intensity of environmental regulation can not only eliminate the financial risk evolution effect of haze pollution at the source, but also block the financial risk evolution path of haze pollution by improving the risk identification and control mechanisms of financial institutions. Compared with the existing literature, this paper explores the financial risk evolution path of haze pollution at the micro level (enterprises and financial institutions), expands the study of the economic effects of haze pollution, deepens the study of the evolution between ecological and economic risks, and also provides empirical evidence for the financial risk evolution effects of haze pollution. This paper shows that haze pollution has potential financial risk evolutionary effects, and its evolutionary path should be blocked by strengthening environmental regulation, actively developing green finance, and improving risk identification and control mechanisms of financial institutions in order to prevent major financial risks more effectively.