There has been a long-standing debate on the relation between corporate environmental performance and financial performance. I hand collect the data concerning the certification status of ISO 14001 environmental management systems (EMS) for China’s listed companies in three heavily polluting industries. I use this ISO certification to proxy for better environmental performance and return on equity (ROE) to measure financial performance. I examine (1) whether improved corporate environmental performance enhances the financial performance; (2) how environmental performance affects financial performance through affecting leverage, profitability (profit margin), and efficiency (asset turnover ratio) drawing on Du Pont analysis. Overall, I find a positive relation between ISO certification and ROE. Furthermore, I find that ISO certification is associated with lower leverage, higher profit margin and higher asset turnover ratio. This suggests that the increases in profitability and efficiency overweight the reduction in leverage, resulting in a net improvement of ROE. My study provides new evidence from China to support the positive relation between environmental performance and financial performance, and has important implications for Chinese policy makers concerning environmental regulations.