This study examines the effect of Major Ecological Function Zones, a modern area-based conservation measure in China. We find that firms within designated zones significantly improve their environmental performance, as reflected by upgrades in government-issued environmental credit ratings and reductions in air and water pollutants. The improvements are more pronounced in counties receiving substantial ecological compensation and among firms with greater financial incentives tied to environmental credit ratings. Higher levels of public environmental awareness and local regulatory oversight facilitate these improvements. Firms achieve environmental improvements primarily through enhancing pollution abatement efforts rather than scaling back productivity. In turn, firms with superior environmental performance benefit from lower debt costs, higher profit growth, and reduced environmental liability insurance premiums. At the aggregate level, designated counties experience improvements in both environmental and economic conditions via industry restructuring. Overall, our findings highlight that regionally tailored biodiversity regulations can align conservation and economic objectives, offering important implications for policymakers, especially in developing and emerging economies.
