Firms’ Transition to Green: Innovation versus Lobbying

Competitive challenges and regulatory uncertainty associated with the green transition should incentivize firms to innovate and to sway regulatory policy. We develop a novel method to identify “green” and “brown” environmental lobbying. We find that firms’ lobbying is unrelated to innovation: green innovators are equally likely to lobby green or brown. Firms’ environmental lobbying is explained by current business operations and predicts real actions, for example future emissions. In contrast, green innovation is better characterized as a real option, to be exercised only if necessary. Despite the informativeness of lobbying, neither environmental ratings nor UNPRI signatories’ investments incorporate this signal.