The effects of environmental performance and green innovation on corporate venture capital

Abstract

The aim of this study is to provide investors, policymakers and others with information on how greenhouse gas (GHG) emissions and green innovation affect corporate financial performance. Although reporting by corporate venture capital (CVC) firms on GHG emissions as well as their green innovation has increased significantly, especially in the last two decades, little is known about how these two factors affect financial performance. To fill this gap, this article investigates the relationships between environmental performance, green innovation, and financial performance in CVC investments in the US over an 18-year period between 2002 and 2019. The results show the effects of GHG-emission reduction and green innovation, both separately and combined, on the financial performance of CVC firms. These findings contribute to the ongoing debate on the role of corporations in the efforts to reach net-zero emissions. The results indicate that emission reductions give firms a financial advantage over time and that there is a financial interest for corporate investors to drive green innovation. These results have important implications for research and practice and illustrate the importance for corporate investors of including ecological considerations in their overall business strategies to create competitive advantage.

Introduction

The worsening climate crisis has come to dominate political discussions in recent years (IPCC, 2022). Researchers are increasingly sounding the alarm and urging governments and policymakers to take immediate action to limit the devastating effects of rising global surface temperatures (O'Garra and Fouquet, 2022; Sun et al., 2022). The main driver of global warming is the accumulation of GHG emissions in the atmosphere (Su and Ang, 2017). To counteract this crisis, 196 parties, including the world's leading governments, have signed on to the legally binding Paris Agreement at COP21, on 12 December 2015 (UNFCC, 2015). One of the major outcomes of this agreement is a commitment to reduce GHG emissions so as to limit global warming “to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels” (UNFCC, 2015). In order to reach this goal, enormous efforts by governments, corporations, and individuals are essential. Accordingly, in recent years, sustainable business practices that support the reduction of GHG emissions have become of vital importance as the world faces this existential crisis. Therefore, many scholars have begun to conduct research on measures and effects in order to shed light on corporate environmental performance.

To the best of our knowledge, this is the first paper that considers the relationship between GHG emissions, green innovation, and financial performance to apply them to corporate venture capital (CVC) investments. CVC refers to venture capital investments made by established corporations in privately held entrepreneurial ventures, in other words, direct minority equity investments (Wadhwa et al., 2016). While many corporate investors face strong societal pressure from their stakeholders to reduce their ecological footprint, they can use CVC investments as a means of acquiring knowledge and technologies, allowing them to significantly improve their environmental performance and reduce their GHG emissions (Battisti et al., 2022). Typically, the aim of CVC investment is to acquire technological innovations (Da Gbadji et al., 2015). A common reason for firms to invest in CVC is to gain knowledge and ideas to support their innovation efforts (Chemmanur et al., 2014; Shuwaikh and Dubocage, 2022) and improve their competitive position by developing those capabilities that enhance organizational performance (Dushnitsky and Lenox, 2006).

Faced with continuous and extreme changes in the environment (Antonioli and Mazzanti, 2017; Appolloni et al., 2022; Sun et al., 2022), CVC investments build linkages to improve environmental performance and pursue green innovation as part of their corporate performance strategies. CVC programs play a role in power building that could improve the performance of the firm (Dushnitsky and Lenox, 2005). Although reporting by CVC firms on their GHG emissions and green innovation efforts, especially over the last two decades, has greatly increased, little is known about the effect of these two factors on the firm's financial performance. To fill this gap, this article investigates the relationships between environmental performance, green innovation and financial performance in CVC investments with a view to helping the parent (investor) company improve strategic performance and generate higher financial returns. In developing hypotheses below, we build on these ideas to contribute to the substantive theory of CVC investments, environmental performance, green innovation and firm value. From our analysis of the relevant literature on the topic, we have identified two main shortcomings which our study aims to address. First, neither the effect of green innovation on financial performance nor the relationship between environmental performance and green innovation has been researched in the specific context of CVC investments. Second, the literature has not yet specifically addressed the combined effect of GHG emissions and green innovation on the financial performance of CVC firms.

This paper presents the first detailed analysis of the impact of GHG-emission reduction and green innovation on CVC investments in the US. The sample comprises 133 CVC firms analyzed over an 18-year period between 2002 and 2019. CVC investment is a suitable context for our research for the following reasons. First, CVCs play a role in funding digital technologies after examination of the financial plans of new, pioneering, and groundbreaking firms (Rossi et al., 2020a, Rossi et al., 2020b). CVC is embraced across many sectors and allows incumbent firms to achieve balance in their corporate strategy (Rossi et al., 2020a). Battisti et al. (2022) demonstrate that corporate investors have exceptional access, compared to other firms, to social and ecological aspects through their investments. Second, CVC investment is a mechanism often used by firms to obtain a window into new technology and a channel through which it can gain knowledge (Maula et al., 2013). CVC develops unique strategies to lead innovation (Shuwaikh and Dubocage, 2022). Battisti et al. (2022) and Wadhwa et al. (2016) demonstrate that CVC investments are seen as an important source of knowledge and innovation by investors. Rossi et al. (2020b) show that CVCs tend to invest in sectors related to their core business with strategic intent, applying knowledge management methods for the accumulation of intellectual capital. Third, scholars have explained the strong positive impact of CVC funding on corporate performance (Dushnitsky and Lenox, 2005). For example, Dushnitsky and Lenox (2006) with Wadhwa and Kotha (2006) find that CVC investment improves valuation performance through citations in addition to patent production and drives a higher market valuation. Research on CVC investments as tools for knowledge acquisition makes a positive contribution to innovation and financial performance in firms (Kang et al., 2022; Keil et al., 2008; Shuwaikh and Dubocage, 2022; van de Vrande et al., 2011; Wadhwa and Kotha, 2006).

Our results make significant contributions to the literature. First, we contribute to the NRBV theory of the firm that is used as the theoretical lens to examine and analyze decarbonization actions (Hart and Dowell, 2011). Our paper provides a practical application of NRBV to CVC investing, focusing on green innovation and the effects on GHG emissions. The NRBV framework is suitable for our context because its central assumption is that environmentally sustainable actions contribute to competitive success (Cristina De Stefano et al., 2016; Menguc and Ozanne, 2005). This study provides empirical evidence on the positive relationships between GHG emissions as a measure of environmental performance and green innovation as an environmental practice. According to our results, green innovation provides an effective strategic environmental approach to GHG emissions reduction, which is consistent with NRBV. We deliver a useful application of NRBV in the CVC context, focusing on green innovation strategies and their impacts on GHG emissions.

Second, our paper contributes to the literature on corporate venture capital by examining CVC investments from the perspective of the investee firm. To the best of our knowledge, this is the first paper that considers the relationship between GHG emissions, green innovation, and the financial performance of CVC firms. Although the impact of environmental performance on financial performance has been covered by previous research, no study has specifically targeted CVC. This paper demonstrates the contribution of CVC investment to firm value which is achieved when firms explicitly pursue environmental performance by harnessing green innovation. Therefore, the results are based on research on a combination of corporate investors' financial performance (e.g. Baierl et al., 2016; Battisti et al., 2022), its relationship with GHG-emission reduction and, more generally, between environmental performance and corporate financial performance (e.g. Busch and Hoffmann, 2011; Russo et al., 2021), as well as the impact of green innovation on financial performance (e.g. Przychodzen and Przychodzen, 2015; Scarpellini et al., 2019) and with the creation of firm value (Dushnitsky and Lenox, 2006). Firms are more likely to pursue CVC activities as a part of their innovation strategy (Wadhwa et al., 2016). In contrast to previous literature which focused on the impact of CVC on innovation, we study the effect of green innovation. This exploration not only enriches the research on the green innovation effects of CVC but also further explores the driving force of green innovation.

Third, our work aims to assist firms in making the green transition. This study analyzes how green innovation works to reduce GHG emissions (Chen et al., 2022, Chen et al., 2021; Du et al., 2019; Xu et al., 2021). Green innovation requires large investment in cleaner technologies to reduce a firm's GHG emissions. We evaluate how green innovation helps firms to cut their GHG emissions. Environmental performance and green innovation should be integral parts of the investment strategies of investors. Analyzing the combined effect of GHG emissions and green innovation on the financial performance of corporate investors suggests that a simultaneous reduction in GHG emissions and increase in sustainability-based innovation has a positive influence on financial performance. This paper elaborates on the relationship between reduced carbon emissions and green innovation and demonstrates their effect on corporate financial performance (Lee and Min, 2015; Ma et al., 2021).

The remainder of this paper is structured as follows. The literature review is presented in Section 2. Data selection and methodology are described in Section 3. Empirical results as well as a discussion about them are outlined in Section 4. Conclusion and policy implications are drawn in Section 5, along with limitations and avenues for future research.