Firms’ Transition to Green: Innovation versus Lobbying

Innovation in green technologies is viewed as a crucial driver of the transition to greener modes of production and consumption. However, there is considerable uncertainty regarding the speed of this transition. Motivated by the fact that regulatory developments represent one key source of uncertainty, we examine how firms complement their innovation activities with efforts to influence the regulatory agenda through lobbying. On average, firms engaging in green innovation do not lobby to increase demand for these products and services. Rather, many green innovators represent firms whose current business operations are mostly brown, and these firms employ lobbying to maintain the status quo, i.e., to protect their brown cash flows into the future. Relative to other green innovators, firms that engage in more brown lobbying have higher rates of future adverse environmental incidents. Evidence suggests that environmental rating agencies do not completely recognize these effects.