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Farmer-led agricultural innovation is increasingly viewed as a potential approach to sustainable agriculture especially promoting rural revitalization as well as mitigating agricultural non-point source pollution. However, little research has yet been paid to evaluating the environmental contribution caused by these emerging agricultural innovations. Using data generated in the Qingpu District of Shanghai, this paper focuses on the new agri-business entities and evaluates the impact of agricultural innovation on changes in their use of chemical fertilizers. The findings indicate that different forms of agricultural innovation have radically different outcomes. Innovation of new production technologies and sales tend to have negative impacts on the environment, while both vertical integration with manufacturing-processing-sales activities, and horizontal integration with service activities, are found to make a positive environmental contribution. The paper argues that the different sources of value added generated by innovation provide different incentives for farmers. Those with a narrow concentration on efficiency and market scale tend to intensify their output-maximized production, while those shifting to processing and service activities rely more on the quality and service centered production, which tends to create less damage to the environment. • Agricultural innovation is becoming a critical part of sustainable agriculture, but little has been known about the environmental contributions. • Agricultural Innovation with a narrow concentration on production efficiency and market scales is found with negative environmental contributions. • Both vertical and horizontal agricultural Integrations contribute to the reduction of chemical fertilizer use. • Supporting policies are required to guide behavior changes of new agri-business entities for sustainable agricultural development. [ABSTRACT FROM AUTHOR]