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Lobbying Activity of Green Firms is Misaligned with Innovation

November 30, 2023

Firms actively engage in protecting their competitive advantages through a combination of innovation and lobbying. Professor Michelle Lowry, Drexel University, and coauthors examine the interaction between innovation and lobbying on environmental technology by constructing a new dataset that combines information on the patenting and lobbying activities of US public firms over the 1999-2020 period. Each patent is classified as green (clean technology) or a brown (dirty technology) innovation, using an established classification. The lobbying data is classified using textual and machine learning tools as green (pro-environment) or brown (anti-environment).

The authors find that firms that innovate more are also more likely to lobby politicians. The key result of the paper is that green innovation does not predict green lobbying. In many cases firms that produce green innovations lobby in support of brown legislation. Why do they do so? The authors consider several alternatives and conclude the market power is the key explanation. To protect their power, incumbents lobby brown and innovate green: 44.2% of green patents are held by market leaders within each industry who actively lobby to protect the brown status quo.

To measure the real effects of innovation and lobbying, the authors examine environmental incidents. Using RepRisk, which scans media outlets around the world to quantify incidents, the authors find that green innovators have 18.3% fewer incidents in the following year compared with other innovators; however, firms that lobby primarily in the brown direction face an increase in incidents by 9.6% in the following year.

These findings provide clear evidence that the true environmental stance of a firm can only be assessed by combining data on innovation and lobbying. The authors show that the ESG ratings fail to do so. While green innovators receive a better ESG rating, they are not penalized by their brown lobbying as they should.

Read full research paper.

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TD Bank Endowed Professor, Professor, Finance