Center for Advancing Accounting

Doing Good by Being Smart: Green Innovation, Firm Performance, and ESG Funds’ Capital Allocation

• In Event: Sustainability and Investment Decisions

Abstract

This paper examines the effects of firms’ green innovation strategies on firm performance and ESG funds’ capital allocation. Because pollution is a manifestation of waste of resources, firms’ investments in pollution prevention technologies can reduce the environmental impact of production and improve financial performance. In contrast, firms’ investments in pollution control technologies incur extra costs and can decrease financial performance. Using green patents to capture these two types of technologies, we find that the value of pollution prevention patents is positively associated with both financial and environmental performance, and its positive impact on financial performance is through an improvement in sales growth and gross margin. Firms with more pollution prevention patents also experience an increase in ESG fund ownership. In contrast, the value of pollution control patents is not correlated with financial performance, weakly positively correlated with environmental performance, and negatively correlated with ESG fund ownership. These findings shed light on how different green innovation strategies affect firm performance and ESG funds’ capital allocation.

Authors

• Qiang Cheng, Singapore Management University

• An-Ping Lin, Singapore Management University

• Mengjie Yang, Singapore Management University