Since the introduction of the Kyoto Protocol and its continuation through the Paris Agreement, environmental governance has remained a central theme in global policy discourse. In China, environmental pollution has emerged as a significant constraint to high-quality economic development. In response, green innovation has become an essential driver of the country's green transformation. As the primary agents of innovation, enterprises play a pivotal role in advancing green practices. Enhancing firms' green innovation capacity has thus become a critical challenge in the current stage of sustainable transition. While the Chinese government has adopted a wide range of environmental policy tools to stimulate corporate green innovation, the actual effectiveness of these policies largely hinges on the presence of a sound legal and enforcement framework. In this context, the development of an effective environmental judiciary system is not only a key component of the broader green policy framework but also holds significant practical relevance for achieving a sustainable economic transformation. This study exploits a quasi-natural experiment involving the staggered establishment of environmental courts across prefecture-level cities in China beginning in 2007. Using a multi-period difference-in-differences (DID) methodology, we empirically investigate how the presence of environmental courts influences local firms’ green innovation practice and further explore the underlying mechanisms.

Our findings reveal several important insights. First, the establishment of environmental courts significantly enhances corporate green innovation, with a more substantial impact observed on substantive green innovation compared to symbolic initiatives. Second, rather than being driven solely by passive compliance due to regulatory vulnerability, firms exhibit proactive self-regulation in response to institutional signals. Specifically, the creation of environmental courts is interpreted by firms as a strong governmental commitment to environmental governance, prompting them to adjust internal strategies accordingly. This adjustment is aimed at improving legitimacy and securing long-term competitive advantage through substantive innovation. Third, this effect is more pronounced in state-owned enterprises and in firms whose management teams exhibit a long-term orientation. Fourth, the study identifies a spillover mechanism whereby executive interlocks—shared executives across different firms—facilitate the diffusion of green innovation practices, resulting in a broader systemic impact beyond individual firm responses.

This study underscores the vital role of environmental judicial institutions in promoting corporate green innovation, especially substantive green innovation. It adds to the literature on corporate social responsibility by highlighting firms’ proactive responses to institutional change, rather than reactive behavior to violations or external pressure. From a risk management and policy perspective, environmental courts help reduce uncertainty, enhance regulatory credibility, and incentivize long-term strategic investment in green innovation. Policy implications include the need to strengthen environmental judicial capacity through professionalization, improved case-handling efficiency, and the development of digital platforms such as online courts. Enhancing the signaling effect of institutional reform—through transparent litigation, public trials, and active media engagement—can further motivate firms’ strategic adjustments. Encouraging state-owned enterprises to serve as role models and fostering inter-firm knowledge diffusion through executive networks and board-level interactions can help scale up green innovation across industries. Corporate leadership should also embrace long-term environmental accountability and embed sustainability into core governance practices to support sustainable development.