The ESG-Innovation Disconnect: Evidence from Green Patenting

No firm or sector of the global economy is untouched by innovation. In equilibrium, innovators will flock to (and innovation will occur where) the returns to innovative capital are highest. In this project, we first document a startling shift in the direction of green patent production. More specifically, we show a shift in the United States’ green innovation landscape over the last 15 years: the majority of recent green patent production is not driven by firms with higher ESG score firms, firms that are commonly favored by ESG funds. Instead, it is driven by firms that are explicitly excluded from ESG funds’ investment universe: namely existing oil, gas, and energy producers. These energy producers produce more, and significantly higher quality, green innovation. Our findings raise important questions as to whether the current exclusions of many ESG-focused policies are optimal, or whether reward-based incentives would lead to more efficient innovative outcomes.