The role of green innovation on oil and gas companies’ financial performance

Abstract

To comply with increasingly strict government environmental regulations, companies have to identify new and innovative solutions to make their products and processes greener, without compromising their financial objectives. This paper investigates the effect of green innovation on financial performance in the US and the European oil and gas industry using longitudinal data from 2010 to 2018. The analysis finds a diminishing positive effect on the financial performance for US companies, where the effect is positive at low levels of green innovation and turns negative at higher levels. For European companies, we find an increasing negative effect, where the effect is negative at low levels of green innovation and turns positive at higher levels. Moreover, we find that for European companies there is evidence that higher oil prices negatively moderate the relationship between disruptive green innovation and financial performance. This suggests that the opportunity cost of disruptive green innovation is high when the oil price is high and that companies are more willing to implement green innovation when the oil price is low. However, this moderating effect is not found for US companies. Based on these findings, as the effect of green innovation on the financial performance of European oil and gas companies depends on the level of companies innovation as well as oil prices, we suggest that in order to encourage oil and gas companies to invest more in green innovation, the public policy makers should have less strict environmental regulations and provide more policy support when the oil price is high. We also suggest that for the European oil and gas companies operating under very strict regulations, it is better to exert full effort in green innovation to gain financial profits. However, for the US companies operating under less strict environmental regulations, low to medium levels of green innovation practices would be more profitable.