Corporate ESG decoupling and R&D investment

Abstract

This study investigates whether and how firms’ engagement in ESG decoupling leads to changes in R&D investment. Using a sample of U.S. listed firms from 2012 to 2023, we discover a consistent negative effect of ESG decoupling on R&D investment, indicating opposite effects from ESG brown-washing versus green-washing. Brown-washing firms exhibit a significant increase in R&D investment. Cross-sectional tests support the strategic incentive that a more pronounced positive effect observed in smaller firms, firms facing greater financial constraints and market competition, and among high-tech firms. In contrast, we find that green-washing firms experience a significant decrease in R&D investment. The decrease in R&D investment among green-washing firms is mitigated by more stringent corporate governance enforced by institutional investors, but is further amplified among firms facing greater market competition and high-tech firms, suggesting that green-washing firms with decreased R&D investment are subject to managerial opportunism. Our findings remain robust to different subsets of benchmarking normal firms and alternative measurement. In addition, we find that the capital market responds positively to ESG green-washing and negatively towards brown-washing, which implies a favorable attitude toward floated ESG disclosure from the investors. Overall, our study unveils the important role of ESG decoupling in reshaping corporate investment decision and contribute to the growing literature on ESG decoupling.