To Starve or to Stoke? Understanding Whether Divestment versus Investment Can Steer (Green) Innovation

Jacquelyn Pless

Entrepreneurship and Innovation Policy and the Economy, 2023, vol. 2, issue 1, 107 - 147

Abstract: More than 1,500 organizations and investors representing more than $40 trillion in assets have committed to fossil fuel divestment to combat climate change. Will it work? This chapter explores whether divestment might induce green innovation, a critical component of the transition to a cleaner economy. Divestment could theoretically steer innovation by increasing the cost of capital for “dirty firms,” but it is unclear whether the effects will be large enough to significantly reduce investment opportunities. I argue that continuing to invest in dirty industries could drive green innovation conditional on investors being socially conscious and governing through “voice.” This hinges upon understanding which firm strategies actually foster green innovation, though, and the commonly used environmental, social, and governance indicators come with several limitations. I demonstrate how decomposing them and using alternative approaches to measuring environmental performance can improve investment, strategy, and management decision-making and policy design. I examine the relationship between 14 specific practices and whether large firms in 16 pollution-intensive sectors are on track for meeting the Paris Agreement emissions targets (“carbon performance”). I find no correlation between carbon performance and the most basic practices, such as disclosing emissions, but a positive correlation for five more explicit strategies: setting long-term quantitative emissions targets, having a third party verify emissions data, incorporating environmental performance into executive remuneration policies, supporting governmental climate change efforts, and setting an internal price of carbon. I construct a new “best practices” score based on these results and find that it has a much higher correlation with carbon performance than some other composite measures.

Date: 2023
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://dx.doi.org/10.1086/723237 (application/pdf)
http://dx.doi.org/10.1086/723237 (text/html)
Access to the online full text or PDF requires a subscription.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:eipoec:doi:10.1086/723237

Access Statistics for this article

More articles in Entrepreneurship and Innovation Policy and the Economy from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().