Environmental Lobbying, Innovation, and the Green Transition

Competitive challenges and regulatory uncertainty associated with the green transition incentivize firms to both innovate and influence regulatory policies. To understand the relation between these two competitive tools, we develop a novel method to identify “green” and “brown” environmental lobbying. Many green innovators engage in extensive brown lobbying, suggesting that firms use these tools for different purposes. We find significant differences in their informativeness for firms’ environmental policies: the direction of lobbying predicts future toxic emissions, whereas green innovation does not. However, neither environmental ratings nor institutional investors incorporate this informative signal, pointing to a misallocation of pro-environmental capital.