Corporate Climate Risk Governance and Environmental Innovation

Abstract

The existing body of literature with regard to climate‐oriented governance focuses on carbon disclosure and climate change commitments, with a notable omission of an essential aspect of sustainable business practices and decarbonization, that is, environmental innovation. In this study, we examine the effect of climate risk governance on firm‐level environmental innovation. Based on a panel of 4378 firm‐year observations from the nonfinancial S&P 500 components over the period of 2011–2021, we provide novel empirical evidence that corporate climate risk governance is positively associated with environmental innovation. Firms with strong climate risk governance appear to engage more in environment‐friendly innovation to reduce environmental costs and the burden on customers. Further analysis identifies a channel, namely, environmental investment, through which climate risk governance facilitates environmental innovation. Our results remain consistent after we employ an instrumental variable approach and propensity score matching estimates to address potential endogeneity bias. The empirical results also pass a battery of robustness tests with alternative variables and different estimation techniques. This study carries important implications for executive management, regulators, and other stakeholders in relation to reforms in governance structures and the advancement of environmentally sustainable innovation.