<p>Growing environmental pressures and intensifying sustainability imperatives are compelling firms to adopt green innovation as a critical strategy for emissions abatement and pollution mitigation. However, the development of green innovation is hampered by persistent financing constraints and insufficient incentives, spurring significant research interest in identifying its key drivers. This study provides empirical evidence on the role of environmental pollution liability insurance (EPLI) in promoting firms’ green innovation. The use of data (2013–2020) from 1,004 Chinese A-share listed firms and the use of a two-way fixed effects model provide robust evidence that EPLI adoption significantly increases​ green innovation output by 37.06%. This effect persists despite the presence of moral hazard, lending strong support to the Porter hypothesis. Mechanism analysis reveals that EPLI enhances green innovation primarily by improving the quality of environmental information disclosure, increasing executives’ environmental awareness, and mitigating financing constraints, thus positively influencing green innovation. Furthermore, it documents pronounced heterogeneous effects: EPLI’s impact is substantially stronger for firms operating in intensely competitive markets, those facing more flexible environmental regulations, and those classified as mature-phase, private, or non-polluting firms. These findings offer insights for policymakers seeking to refine EPLI design, incentivize corporate environmental practices, and accelerate the transition towards sustainable development.</p>