Conventional versus green investments: advancing innovation for better financial and environmental prospects

ABSTRACT Recently, the level of climate change has substantially been rising; relatively not much is known on ‘how’ companies alter the association between their environmental performance and financial performance within the context of specific elements of innovation: conventional innovation and green innovation. Drawing upon the stakeholder theory and the natural resource-based view of the firm, this research uses firm-level Environmental, Social, and Governance (ESG) data of 462 companies across 7 Asian countries for the period 2015–2019 and employs time fixed-effects panel regression with country and industry dummies. We find that measures of innovation (i.e. conventional innovation and green innovation) are beneficial to the firm value. However, the positive effect of conventional innovation on the firm valuation builds at the expense of the environment since it poses a significant threat to environmental quality by positively contributing to carbon emission. Whilst firms’ investments in green innovation are advantageous to either type of firm performance. Further analysis shows that firms that focus on environmental practices generate significant outcomes, e.g. improved financial performance, suggesting that firms should prioritize their green investments to enhance the innovation outcomes so as to achieve superior financial value and to attract potential environmentally proactive stakeholders.