International Evidence on How Investors Value Environmental Innovation: Non-Pecuniary Investor Preferences or Risk Mitigation?

We study how environmental innovation shapes investor expectations. We propose two mechanisms through which sustained improvements in environmental innovation may influence these expectations: non-pecuniary investor preferences and risk mitigation. Using an international sample, we find that long-term improvements in environmental innovation materially influence investor expectations, as reflected in a lower ex-ante cost of equity and higher market valuation. Our evidence further highlights the moderating role of intra-industry R&D dispersion, which captures firms' risk of falling behind their industry peers technologically. We show that investors do not reward environmental innovation unconditionally; they value sustained improvements in environmental innovation more when firms operate in industries with higher R&D dispersion because they perceive that such improvements will likely lower risks of technological lag and transition-related vulnerability. Overall, our findings suggest that sustained improvements in environmental innovation shape investor expectations primarily through the risk mitigation mechanism rather than through the non-pecuniary investor preference channel.