Green innovation and financial performance. The role of R&D investments and ESG disclosure

Abstract This study investigates the effects of green innovation (GI) on financial performance under both accounting and market‐based perspectives in European Union (EU) listed non‐financial firms. In addition, this study explores whether the R&D investments and the Environmental, Social and Governance (ESG) disclosure play a mediating role over the association between GI and accounting‐based and market‐based financial performance, respectively. Based on a sample of 526 firms over the period 2012–2022, we find that GI is negatively associated with accounting‐based financial performance and positively associated with market‐based financial performance. We further find that GI impacts on accounting‐based financial performance via the channel of R&D investments and on market‐based financial performance via the channel of ESG disclosure. This study provides useful contributions to prior research by encouraging the adoption of an integrated perspective when evaluating potential effects of GI. This study can also assist managers in better preparing for the challenges of implementing GI by leveraging the ESG disclosure. It also advices to investors to carefully assess the more complex impact of GI on financial performance of the firm within their capital allocation decision‐making process. In the same vein, it offers some insights to policy makers interested in facilitating the transition to a sustainable economy.