The Green Tobin’s q: Theory and Evidence€¦ · The Green Tobin’s q Faria and Tindall Page 3...

The Green Tobin’s q: Theory and Evidence

Abstract: This paper derives from a dynamic stochastic model a green Tobin’s q as a function of

pollution abatement efforts, stockholder proposals for green effort, R&D expenditures, stock of

knowledge [given by patents in green technologies], firm’s capital stock and investments.

Regression results using data from the oil industry show that most of the models indicate a negative

impact on Tobin’s q from green patents and R&D, and a positive one from shareholder proposals.1

Keywords: Pollution, R&D green technologies, firm objectives

JEL Classification Numbers: Q55, L29, G32

1 We would like to thank, without implicating, Doug Cumming, Ky Yuhn and Hasan Bhuyan for their comments.

The Green Tobin’s q Faria and Tindall

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1. Introduction

Ever since Friedman (1970) made the “social responsibility of business” well-known (to

increase profits), academics have searched for the value-relevance of various corporate social

components. Over twenty years ago, Griffin and Mahone (1997) studied twenty-five years of

corporate social performance (CSP) and corporate financial performance (CFP) only to deduce:

“the a priori use of measures may actually predetermine the CSP/CFP relationship outcome.” (p.

5) In the interim, the value of environmental performance, in particular, has gathered considerable

interest, but often viewed only through the broader lens of corporate social responsibility (CSR),

socially responsible investing (SRI), environmental, social and governance (ESG) or the general

notion of “doing well and doing good.” (Bhandari & Javakhadze, 2017; Dutordoir, Strong, & Sun,

2018; Griffin, Neururer, & Sun, 2018; Hamilton, Jo, & Statman, 1993; Renneboog, Ter Horst, &

Zhang, 2008b; Renneboog, Ter Horst, & Zhang, 2011). In their meta-analysis of 251 studies,

Margolis, Elfenbien, and Walsh (2009) find a small but positive relationship between social and

financial performance that is getting smaller over time.

Similarly, the intersection between financial and environmental performance has gained

more interest in energy economics, delivering similarly mixed evidence (Nordhaus, 2002; King

and Lenox, 2002; Buonnano et al., 2003; Elsayed and Paton, 2006; Newell, 2007; Popp, 2006;

Konar and Cohen, 2001). As (Buchanan, Cao, & Chen, 2018) note, “existing theoretical research

remains inconclusive on the effect of CSR on firm value or financial performance.” (p. 1) To our

knowledge, only one paper (Fatemi, Fooladi, & Tehranian, 2015) provides theory for what to

expect of CSR. We add to the literature by extending well-documented q-theory to include green

considerations that heretofore have largely been empirical and ad hoc. We focus on the

environmental component of firm social considerations in the Green Tobin’s q to fill this gap in

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the literature and offer some evidence from the oil industry to test the model herein derived.

Similar to the empirical literature, we find both positive and negative relationships of

environmental and financial performance.

Recently, there has been increasing political and public pressure on companies to improve

their green record (Cahan, Chen, Chen, & Nguyen, 2015). Some studies find this pressure to be

value destructive for political inclinations (Di Giuli & Kostovetsky, 2014) or entrenchment

considerations (Surroca & Tribó, 2008), while other research has found that the pressure for better

CSR commands higher acquisition premiums (Deng, Kang, & Low, 2013), provides a strategic

choice (Wu & Shen, 2013) and generates positive abnormal return for environmental and social

engagement (Dimson, Karakaş, & Li, 2015). Firms’ stockholders have also been influenced by

public opinion and are putting additional pressure on corporations to improve their environmental

performance (Flammer, 2015). It is in the best interests of large corporations to help preserve the

environment, has become a mantra. If their activities hurt the environment, through pollution for

instance, they are supposed to invest in new technologies to abate pollution and avoid market

retribution.

This paper investigates the nexus between financial performance (Tobin’s q) and

environmental efforts: green technology, an internal measure at the forefront of firm activities, and

green shareholder pressure, an external measure expressing concern over current firm practices.

If green efforts increase profits, firms have incentives to reduce their environmental damages.

Since corporations invest in R&D for the development of green technologies and shareholders

pressure firms to address environmental concerns, these investments must surface in Tobin’s q at

some point. The objective of this paper is to theorize under what conditions Tobin’s q becomes a


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function of green efforts and to test this theory with data from the oil industry for an assessment

of the size and signal of the impact on q.

The focus on oil companies is justified, since they are deemed as one of the main culprits

of pollution, kept in the public eye by the ubiquitous presence of gas stations, possibly at the

epicenter of the debate on climate change. Reputational capital is important to these highly visible

firms (Cahan et al., 2015; Jha & Cox, 2015). Intense analyst scrutiny (Adhikari, 2016; Griffin et

al., 2018) of some of the largest publicly traded companies places additional pressure on oil

companies to mitigate risk exposure, environmental or otherwise. For these reasons, the green

policies of oil firms make them prime candidates to examine. As pondered in a recent article by

The Economist, “for all the cynicism that oil firms are ‘greenwashing’ their way through the energy

transition, [their] efforts should be taken seriously. But how seriously?” (Ryder, 2019, p.1). This

paper provides theory to answer that question.

Rather than rely on CSR, ESG or SRI indexes, we employ two hand-collected samples for

our measures of green effort. For green technology effort, we search Google Patents for any

patents filed by the major oil firms which mention “carbon emissions” and corroborate this search

with patent data from Patstat. For green pressures, we review all shareholder proposals to these

firms which mention “climate change.” The Green Tobin’s q model focuses on how these green

efforts,2 along with traditional components, are a function of q. We find that green technology

effort is negatively correlated with q, and green pressure is positively correlated with q. These

correlations hold for most of the models we use to test our model: established control variables,

along with time and firm invariant factors, followed by causation exercises. The granularity of the

data exposes the strength of each component’s influence on q.

2 In the appendix, we also consider abatement costs in Error! Reference source not found..


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The rest of the following paper is organized as follows: The next section reviews the

literature. Section 3 derives a stochastic model to determine the Green Tobin’s q. Section 4

presents evidence of green effort for all major firms in the petroleum industry. We test the model

in Section 5 with data from the oil industry and various statistical methods from the literature.

Section 6 finds robustness. Concluding remarks appear in Section 7.

2. Literature Review

Essentially, q-theory of investment says that a q greater than unity stimulates investment,

i.e., when capital is valued more highly in the market than it costs to produce it, investment flows

to this opportunity for growth (Brainard & Tobin, 1968). Therefore, any examination of Tobin’s

q, green or otherwise, compares market value to replacement costs, a comparison of accounting

data to financial valuation, as stressed by Lindenberg and Ross (1981). Tobin’s q is the ratio of the

market valuation of real capital assets to the current replacement cost of those assets (Tobin &

Brainard, 1977). As certain as the balance sheet equates assets to claims against them, Tobin’s q

considers the market’s opinion of all assets in ratio form to their booked costs.

2.1. Green Technologies

It is well-known that there are two market failures associated with new green technologies:

environmental externalities and the public goods nature of new knowledge. As a consequence,

there is underinvestment in R&D greener technologies. To address this shortcoming, government

subsidies to greener R&D projects are often proposed as part of a policy solution (e.g., Newell,

2007). Popp (2006) shows that R&D subsidies lead to significant increases in climate-friendly

R&D, however this R&D has little impact on the climate itself. Dechezleprêtre et al (2013)

examine the economic consequences of government support for development of clean technologies


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and find they generate up to 40% higher levels of spillovers into unrelated industries. These authors

also investigate the impact of knowledge spillovers on firms’ market value, using firm-level

financial data to find that the marginal economic value of spillovers from clean technologies is

also greater. As is well-established in the innovation literature (Nelson, 1959), those that invent

do not always reap the benefits, thus a distinction between socially desirable and privately

profitable (Aghion & Howitt, 1990), almost an inherent consequence of incomplete contracts

(Grossman & Hart, 1986). Consequently, a negative association of green effort and market value

may merely reflect political will to subsidize what the market judges to be more socially desirable

than privately profitable. Over time, however, all firm investments and expenditures are expected

to produce profits. At some point, the market renders a verdict: the green effort either find market

support as an investment or proves to be a social subsidy.

Another important related issue analyzed by the literature is whether environmental R&D

crowds out other R&D investments. Nordhaus (2002) shows that new energy R&D completely

crowds out other R&D; his result is due to the assumption of a fixed supply of R&D labor. If

energy R&D is a complement of other R&D, crowding out does not occur (Buonnano et al., 2003).

Popp and Newell (2014) find no evidence at the industry level of crowding out across sectors but

do discover that increases in alternative energy patents leads to fewer patents of other types. This

begs fundamental questions that Hicks (1932) hypothesized of factors of production when they

become relatively more expensive; “induced innovation” explains governmental efforts to affect

input prices. On the margin, do green technologies crowd out at the expense of technologies? Are

green technologies winning a competition assisted by the government? No matter how vast a

firm’s internal markets, tournaments for resources within the firm keeps the competition lively.


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Whether or not the prize is charity, investment or signal (Lys, Naughton, & Wang, 2015), the

Green Tobin’s q provides a theoretical roadmap for empirical application.

The empirical literature on the relationships between environmental and financial

performance finds ambiguous results, much like the empirical ambiguity of value created by CSR

(Margolis, Elfenbien, and Walsh, 2009). Elsayed and Paton (2006) show in a static and dynamic

panel data analysis that environmental performance has a neutral impact on financial

performance. Some studies (e.g., Cordeiro and Sarkis, 1997, Sarkis and Cordeiro, 2001, Wagner

et al., 2002, Rassier and Earnhart, 2010) find a negative relationship. Other articles (e.g., Konar

and Cohen, 2001, King and Lenox, 2002) report a positive relationship. For instance, Konar and

Cohen (2001) indicate that a decrease in toxic chemical emissions ameliorates Tobin’s q − 1 (or

the intangible portion of q) in the S&P 500 firms. King and Lenox (2002) find evidence that waste

prevention is underused, and that firms can improve their financial performance by engaging in

more waste prevention. Ambec and Lanoie (2008) suggest that better environmental performance

can improve financial performance in both cost reduction (e.g. risk management and relations with

external stakeholders; costs of material, energy, and service; cost of capital; and cost of labor) and

revenue creation (e.g. better access to certain markets, differentiating products and selling

pollution-control technologies). Chava (2014) finds material reductions in a firm’s cost of capital

when screened according to their environmental profile. A slight edge for a positive relationship

between environmental and financial performance appears to favor more recent studies.

The measures and samples of financial and environmental performance are many and

varied. Iwata and Okada (2011) study the financial performance of Japanese manufacturing firms

responding to different environmental issues. The authors employ various indices -- such as ROE,

ROA, return on investment (ROI), return on invested capital (ROIC), ROS, Tobin’s q − 1, and the

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natural logarithm of Tobin’s q -- in order to take into account each market's evaluation of corporate

effort to deal with different environmental issues. Waste emissions do not have significant effects

on financial performance, while greenhouse gas reduction leads to an increase in financial

performance but for clean industries only. Nakao et al. (2007) also studies Japanese firms to show

that a firm's environmental performance has a positive impact on its financial performance and

vice versa. Lioui and Sharma (2012) construct a study to expose direct versus indirect impacts of

ECSR (environmental corporate social responsibility.) The authors discover that the direct impact

of on ROA and Tobin’s q is negative, while the interaction of ECSR and R&D has a positive and

significant impact on q. ECSR strengths and concerns harm financial performance since they are

perceived as a potential cost, but additional R&D effort to address these costs is rewarded. In

allowing for indirect impacts while decomposing the ECSR index, Lioui and Sharma (2012) find

strong support for their main finding: firm value benefits from R&D effort spurred by ECSR. The

proxies employed, sample construction and decomposition influence the sign, size and strength of

the relationship between environment and financial performance.

Timeframe and length, of course, also exert an influence. When environmental regulation

is considered, Delmas et al. (2015) find a negative short run impact on accounting returns but

positive long-term value implications for Tobin’s q through improved environmental performance.

These negative short-term but positive long-term implications are also observed by Cordeiro and

Sarkis (1997). Horváthová (2010), through meta-analysis, finds that a more consistent, negative

link between environmental performance and financial performance with simple correlation

coefficients and portfolio studies, than with more sophisticated econometric techniques (multiple

regressions and panel data) which fail to provide consistent evidence. A positive link is found in

her meta-analysis of 37 empirical studies, but these win-wins for environmental performance and


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financial performance are found more frequently in common law countries where investors are

afforded more protection than in civil law countries. Even over extended horizons, a consistent

signal between environmental and financial performance is difficult to find.

Consistency in the oil industry, likewise, has its challenges. Oil and gas firms have been

categorized as “low R&D intensity” because they have historically invested less than 1% of their

net revenue in research and development (von Tunzelmann and Acha, 2006; Moncada-Paternò-

Castello et al., 2010). Apparently, the industry seems to be changing. Technology appears as an

increasingly important strategic priority for several international oil companies (IOCs) (e.g.,

Kulkarni, 2011; Parshall, 2011; Chazan, 2013). Spending on innovation and R&D by oil

companies rose dramatically over the past few years (Thuriaux-Alemán et al., 2010). Many

companies have adopted the concept of “open innovation” (Chesbrough, 2003) and more

collaborative models of R&D embracing ideas from other industries and technical domains (e.g.,

Verloop, 2006; Ramírez et al., 2011).3 Helfat (1994) investigates a hypothesis of the evolutionary

theory of business firm (e.g., Nelson and Winter, 1982), namely, that firms within an industry will

persistently differ in the amount of effort and expenditures devoted to various R&D applications.

He finds evidence supporting the theory testing the hypothesis for the petroleum industry. Perrons

(2014) studies how innovation occurs in the oil and gas industry with two main discoveries: first,

that service companies file more patents per innovation than other types of organization, and that

neither universities nor government research organizations are valuable sources of information and

knowledge in industry’s R&D initiatives. For these reasons, the oil industry is a timely sector of

3 Haas and Popov (2019) show that carbon-intensive industries develop and implement greener technologies; they produce more green patents as the stock markets deepen.


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the economy to examine, even if the industry’s relationship between environmental and financial

performance, itself, is not timeless.

The literature on the financial performance of environmental (green) technologies lacks

theory to clarify when crowding out can be expected, why more recent studies increasingly find

positive correlations between environmental and financial performance and what is prompting

more intense innovation efforts in the oil industry. As explained next, the investing public and

existing investors in these firms have become more vocal in their concerns with the environment.

2.2. Green Stockholder Pressure

Speaking directly to the R&D environmental initiatives at oil companies, the CEO of Royal

Dutch Shell, Ben Van Beurden, emphasized recently, when discussing the “hard truths” about

climate change, the need to gather shareholder approval. The confrontation of climate change,

according to him, “needs shareholders’ support to move in the right direction.” (Ryder, 2019).

Given this insight, shareholder support can be viewed as the green light for oil firms to pursue

green efforts, from the perspective of existing investors. Green q theory sheds light on the market’s

opinion in a world of alternative investments. In reference to the literature, this desire to garner

shareholder support for these risky green efforts relaxes firm tolerance for loss that encourages

innovation (Chen, Leung, & Evans, 2016; Manso, 2011). Thus, if firms are to innovate ways to

abate pollution or create clean technologies, a greater lenience for research that “fails” to develop

is requisite to the creative process. In other words, owners leaning less on agents for immediate

profits and being more tolerant of the failures that accompany R&D is conducive to innovation.


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Several studies examine how shareholders govern the environmental impact of their

investments. Kock, Santaló and Diestre (2012) focus on conflicts between stakeholders and

management, by examining boards, corporate control and regulation as forms of governance to

discover their impact on environmental performance; governance helps resolve conflicts over

environmental responsibility. Flammer (2015) investigates the impact on Tobin’s q several years

after a CSR proposal gathers majority support; she finds a significant positive association four

years hence. Amore and Bennedsen (2016) exploit changes in anti-takeover legislation and

variation in state abatement costs to determine weak governance impeding the efficiency of

environmental innovation. Bhandari and Javakhadze (2017) demonstrate the distortions to

investment sensitivity that CSR has in a traditional q-theory framework, namely, firms with higher

CSR scores have a less sensitive q-investment relationship. Importantly, the authors examine the

environmental component of CSR to discover a heightened investment sensitivity: a distortion that

becomes more pronounced when there is more potential for agency conflicts and greater

stakeholder engagement. Whether investments are being made in firms or by firms, CSR measures

impact investment decisions.

As alluded to above, CSR is an investment like any other investment that competes for firm

resources, a competition that can be swayed by shareholder pressure. The question that occurs on

the margin becomes: Since “the law gives corporate managers considerable implicit and explicit

discretion to sacrifice profits in the public interest” (Elhauge, 2005, p.1), when does the market

render its verdict? Green Tobin’s q helps evaluate this discretion such that a determination can be

made if “CSR is close to theft” (Reinhardt, Stavins and Vietor, 2008, p. 221) or the distance from

Butler and McChesney’s (1999) “bad philanthropy” (p. 1205). Although they do not employ q-

theory and examine environmental performance specifically, Fatemi et al. (2015) derive a model


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for the impact of CSR on firm value and demonstrate through simulations that, in some

circumstances, CSR expenditures do create value. Extending Green Tobin’s q to allow for

shareholder pressure and stakeholder engagement provides theory for empirical assessments.

The literature on shareholder proposals has struggled to identify definitive purpose for this

form of governance, most of which is centered on the United States where proposals make regular

appearances (Manne, 1965; Pound, 1988; Karpoff et al, 1996; Gillan and Starks, 2007; Levit and

Malenko, 2011; Renneboog and Szilagyi; 2011). Even if not definitive purpose, Buchanan, Netter

and Yang (2010) find stronger associations for US proposals than those in the UK to impact

management behavior. Exploiting discontinuities in market reactions around “close call” votes at

annual meetings, Cuñat, Gine and Guadalupe (2012) find positive market responses to increased

governance. Such an approach to discontinuity is also employed by Flammer (2015) who

discovers positive announcement returns for CSR proposals that pass when vote outcome is too

close to call prior to the annual meeting. As supplemental evidence, Flammer (2015) investigates

the impact on Tobin’s q several years after a CSR proposal gathers majority support; she finds a

significant positive association four years hence. With guidance from the literature, the following

model theorizes how shareholders are able to influence their investments when expressing climate

concerns through their proposals.

Even if ad hoc, the literature provides insight on the function of green efforts in Tobin’s q.

Although we conduct several empirical exercises in line with previous literature, we are primarily

concerned with theory to explain how green effort functions in profit-maximizing firms and is

reflected in their q, rather than aligning with one side of the “goodness” debate or reconciling

conflicting evidence in the literature. As we demonstrate next, green efforts affect the probability

of successful innovations and abatement costs to address environmental concerns, reflected in q.


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3. The Model: Green Tobin’s q

The industry has N identical firms, the representative firm’s real profits, neglecting all

costs, are proportional to its capital stock k, and decreasing in the industry-wide capital stock K;

thus they take the form 𝜋(𝐾)𝑘, where 𝜋′(𝐾) < 0.4

The representative firm also invests M in the innovative activity, which is the rate of

expenditure in R&D of cleaner technologies that help abate pollution. Assuming zero depreciation

rate, the firm’s investment I, equals the rate of change of the firm’s capital stock, �̇� and R&D

expenditures M:

𝐼 = �̇� + 𝑀 (1)

The variable V represents the stock of knowledge, which is accumulated as an increasing

function of R&D expenditures:

�̇� = ℎ(𝑀) (2)

There are adjustment costs associated with the rate of change of the firm’s capital stock

and pollution abatement A, 𝑍(�̇�, 𝐴) = 𝑎𝐴𝐶(�̇�), where a is a parameter representing stockholder

pressure for green effort, and C(�̇�) is a convex function of the rate of change of the firm’s capital

stock satisfying, 𝐶(0) = C′(0) = 0, 𝐶′(�̇�) > 0, 𝐶"(�̇�) > 0.

R&D may be fruitless, as it is a risky activity. Therefore, firm’s profits overtime are

impacted by the uncertainty of innovative activity. The representative firm’s intertemporal profits

are given by:

4 See Romer (2006)


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∫ 𝑒−𝑟𝑡{ℵ(𝑉)[𝜋(𝐾)𝑘 − 𝐼 − 𝑎𝐴∞

0𝐶(�̇�)] + 𝑤(𝑉)ℎ(𝑀)ℶ(𝑘, 𝐴)}𝑑𝑡 (3)

Where the term 𝑤(𝑉)is the subjective probability density function that the innovation will occur

at the state of knowledge V, so the probability density that the innovation will occur at time t is

𝑤(𝑉)ℎ(𝑀). ℵ(𝑉) is the probability that the innovation will never occur. The term ℶ(𝑘, 𝐴) denotes

the maximized value of the integral of the profits after the innovation happens.5

Pollution abatement efforts A reduce the amount of pollution P in the environment:

𝑃𝑡 = 𝑃0 − ∫ 𝐴𝑑𝑡∞

0 ≥ 0 (4)

It is assumed that the initial level of abatement efforts is normalized to 1: 𝐴0=1/a

The representative firm’s problem is to choose intertemporal paths of the control variables

I, A and M with a view to maximizing (3) subject to Eqs. (1), (2) and (4). The Hamiltonian of the

problem is:

𝐻 = 𝑒−𝑟𝑡{ℵ(𝑉)[𝜋(𝐾)𝑘 − 𝐼 − 𝑎𝐴𝐶(𝐼 − 𝑀)] + 𝑤(𝑉)ℎ(𝑀)ℶ(𝑘, 𝐴) + 𝑞(𝐼 − 𝑀) + 𝛾ℎ(𝑀)} − 𝜇𝐴

(5)

Where q and are the co-state variables for the dynamic constraints (1) and (2) respectively.

From the first order conditions for investment I we derive the Green Tobin’s q:

𝐻𝐼 = 0 → 𝑞 = ℵ(𝑉)[1 + 𝑎𝐴𝐶′(𝐼 − 𝑀)] (6)

5 See Dasgupta (1982) for a discussion.


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Note that in the absence of R&D in green technologies, M=0, we have no uncertainty and

the level of pollution abatement efforts is at their initial level: 𝐴0=1/a. As a consequence, Eq.(6)

yields the well-known Tobin’s q:

𝑞 = [1 + 𝐶′(𝐼)] (7)

According to Eq. (7) the cost of acquiring a unit of capital equals the purchase price (fixed at 1)

plus the marginal adjustment cost. Note that in the steady state, I=0 and q=1.

Comparison of Eqs. (6) and (7) shows that the Green Tobin’s q depends on the stock of

knowledge V, pollution abatement efforts A and R&D expenditures M. However, in order to fully

examine the determination of the Green Tobin’s q we need to take into account the remaining first

order conditions [FOC] of the problem:

𝐻𝐴 = 0 → 𝑒−𝑟𝑡{ℵ(𝑉)[−𝑎𝐶(𝐼 − 𝑀)] + 𝑤(𝑉)ℎ(𝑀)ℶ𝐴(𝑘, 𝐴)} = 𝜇 > 0 (8)

𝐻𝑀 = 0 → ℵ(𝑉)[𝑎𝐴𝐶′(𝐼 − 𝑀)] + 𝑤(𝑉)ℎ′(𝑀)ℶ(𝑘, 𝐴) = 𝑞(𝐼 − 𝑀) − 𝛾ℎ′(𝑀) (9)

�̇� − 𝑟𝑞 = −{ℵ(𝑉)𝜋(𝐾) + 𝑤(𝑉)ℎ(𝑀)ℶ𝑘(𝑘, 𝐴)} (10)

�̇� − 𝑟𝛾 = −{ℵ′(𝑉)[𝜋(𝐾)𝑘 − 𝐼 − 𝑎𝐴𝐶(𝐼 − 𝑀)] + 𝑤′(𝑉)ℎ(𝑀)ℶ(𝑘, 𝐴)} (11)

Equations (8) and (9) equal marginal costs to marginal benefits of pollution abatement

efforts and R&D expenditures, respectively. Eq.(10) equals the marginal revenue product of capital

to the opportunity cost of a unit of capital, given by the difference between foregoing interest rate

and capital gains 𝑟𝑞 − �̇� . In the same vein, Eq.(11) equals the marginal revenue product of

knowledge with the opportunity cost of a unit of knowledge.

Consider the steady state, where �̇� = �̇� = �̇� = �̇� = 0 , in the system of equations (1), (3),

(4), (6), (8)-(11) which determines the optimal values of 8 endogenous variables I, A, M, V, q, k,


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and . The system is block recursive causal. Equation (3) determines the equilibrium value of

M, and Eq. (4) the equilibrium value of A, then, given A, Eq.(1) determines the equilibrium value

of I. Given A, M, and I, the sub-system (6) and (9)-(11) determine simultaneously the optimal

values of V, q, k and . Finally, the last endogenous variable determined by the model is

In accordance with this block recursive structure of the model, one can write the Green

Tobin’s q as a function of pollution abatement efforts [proxied by environmental expenses] A,

stockholder proposals for green effort a, R&D expenditures M, stock of knowledge [given by

patents] V, firm’s capital stock [given by Assets] k and investments I.

𝑞 = 𝑞(𝐴, 𝑀, 𝑉, 𝑘, 𝐼, 𝑎) (12)

Due to the complexity of the model, related to the probability distribution of green

innovations, we are unable to do a comparative statics analysis of the model in order to determine

a priori the impact of each variable on the Green Tobin’s q. This is an empirical task which is

carried out in the next sections, in which we examine the firm’s green efforts – abatement, clean

R&D and knowledge, A, M, and V, respectively – and the exogenous green effort of stockholder

proposals, a.

4. Green Effort: Technology and Pressure

The main intent of this paper is to derive a theoretical proof of Green Tobin’s q as shown

in the preceding section, and then apply it to two of the aforementioned parameters on green effort:

technology and pressure. This effort is examined both internally of firms for green technologies

that they research and develop then file a patent to protect, and externally by shareholders who

apply green pressure through their proposals to address climate change issues. In the next section,

we gauge the marginal contribution of additional green effort by both owners and agents, where


Page 17 of 62

Green q theory explores empirical application suggested by the literature. Before that, we examine

recent trends in these green efforts.

Figure 1 presents green tech effort by all major firms in the petroleum industry over two

decades. Patented effort, presumably, is not just to greenwash websites, financial statements and

presentations meant to impress investors and allay the public. Such effort cuts straight to a firm’s

competitive edge in what it means to offer new products or processes or improvements upon them:

in this case, patents on green technologies. While patenting activity may not entirely represent all

technological effort a firm exerts towards its value proposition, patents certainly do represent those

technologies that firms are willing to defend their right to enjoy exclusive use or use for a fee. In

other words, the risk of exposing technologies (by making public through the patenting process)

is worth the right to fight for the rent saved or collected. In this sense, patents would be an

expensive way for a firm to artificially green its processes and products. Patents expose a firm to

expropriation and the upfront legal expenses in hopes of recovering damages incurred and proven

in a court of law. For these reasons, patents filed by the major petroleum firms which mention

carbon emissions6 can be reasonably assumed to address one of the more pressing environmental

6 While several phrases and words were considered, “carbon emission” adequately represents issues related to greenhouse gases and climate change. While methane, sulfur and other gases do contribute to the issue, carbon emissions are always the first addressed by petroleum firms in their public statements about climate change. Further, mentioning “carbon emission” in a patent lends the phrase some weight for enforcement, i.e. patents must be specific enough to identify a feature to which a legal right can attach. A general phrase like greenhouse gases might make a patent too obscure or ambiguous to enforce.

In scanning the actual patents, themselves, many are even more specific: e.g. “low carbon emissions.” However, it would be difficult to imagine any patents that seek to secure a right to increase carbon emissions. That firms include carbon emission in a patent implies some efficiency or reduction in the process or product. For all these qualifications, carbon emission in patents filed is believed to represent green technological effort in an unambiguous manner. The literature has struggled to identify (Konar and Cohen, 2001) or agree upon an objective measure of environmental performance. One of the most commonly used measure is the MSCI-KDL index, which is a composite of environmental, social and governance indicators rendered by expert opinion but opinion, nonetheless. Patents are risky endeavors with a forward-look expressed by firms at a point in time when filed.

As an alternative to carbon emission patents, we also follow Flammer’s (2018) investigation of green bonds. Similarly, she studies “green patents” and defines them as those patents with certain CPC (Cooperative Patent Classification) codes (see her footnote 21), then takes the ratio of green to total patents in a given year to find a mean of .14 for green bond firms and .128 for matched firms without green bonds. Likewise, for robustness, we replace “carbon emissions” with CPC with the Y02 classification for patents TECHNOLOGIES OR APPLICATIONS FOR MITIGATION OR ADAPTATION AGAINST CLIMATE CHANGE. Our results in the regressions that follow are comparable to those using an alternative definition. See appendix table 15.


Page 18 of 62

issues facing oil firms: climate change. More generally, these carbon emission patents are a good

proxy for a green technological effort at the firm level that is relevant to a particular industry.

Insert Figure 1

To put this green tech effort in perspective, it would be helpful to know how much total

tech effort a firm expends on all patents. Further, vast differences in legal institutions might make

more or less “patenting sense” in different countries, as the enjoyment of the legal right to a patent

might make the effort involved more or less attractive. Particular to each firm, an overall strategy

(e.g. Porter’s differentiation or low-cost leader) might also incline a firm to patent more or less.

Whatever the reason or predisposition, the relative effort of green tech to all technology is more

informative than the number of carbon emission patents in Figure 1 above. The percentage of

green patents to total patents implicitly considers a tradeoff or crowding of competing technologies

(Popp and Newell, 2014), as the green effort may have been deployed elsewhere in the firm. To

this end, Figure 2 demonstrates the percentage that carbon emission patents are of total firm patents

for each of the major oil firms in the world that file patents.

Insert Figure 2

There are marked differences in the emphasis that individual firms place on these carbon

emission patents, even within the same country. Some firms are increasing their relative green


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tech efforts, while others are deemphasizing it. Some have clear direction, while others lack focus.

Petroleo Brasileiro in Brazil, Eni in Spain, Royal Dutch Shell in the UK and ExxonMobil in the

US have fairly distinct patterns of increasing their relative green efforts, while Chevron and

PetroChina exhibit discrete declines in such efforts. Still other firms appear to be indecisive in

their efforts: Sasoil in South Africa and Total in France.

Although we are concerned with firm-level evaluation, the relative green tech effort by

country is offered in Figure 3. The relative size of the annual contribution of green technologies

to the global stock of knowledge in the oil industry displays a slight increase. Carbon emission

patents rise from just below to just above 10% of all patents filed. These green efforts are led by

the UK, US and Continental Europe. Countering the trend, China and the Rest of the World have

declined in their proportions of carbon emission patents to total patents over time, which are also

the lowest levels of the countries.

Insert Figure 3

To help narrow differences between firms and focus on countries experiencing similar

economic trends in developed markets, Figure 4 provides a comparison of these green tech efforts

between the US and UK, which should have meaningful implications to value, i.e Tobin’s q.7 In

the United States, ExxonMobil (“Exxon”) has increased its percentage of green patents over time,

while Chevron has decreased its percent of patents that reference carbon emissions. The same can

7 As will be discussed in the section that follows, the sample used for empirical tests comprises these four US and UK firms: ExxonMobil, Chevron, BP and Shell. The sample time period is the 20-year period from 1998 to 2017, even though events and developments outside this time period are discussed here for their importance.


Page 20 of 62

be observed of the two major petroleum players in the United Kingdom: Royal Dutch Shell

(“Shell”) has increased their relative green tech effort over time, while British Petroleum (“BP”)

has decreased its relative number of carbon emission patents. This dynamic variation of green

attributes over time for highly comparable firms provides an excellent opportunity to distill the

function of this green attribute on Tobin’s q.

Figure 4 provides a timeline comparison of the relative green efforts of US and UK

petroleum firms. Importantly, these four firms also list each other as direct competitors in their

annual reports. It is worth noting that, despite the opposing patterns, it is only more recently that

Exxon and Shell have risen to the higher levels that BP and Chevron started with at the beginning

of the sample period.

Insert Figure 4

It is also worth revisiting the number of patents each firm generates. Figure 5 demonstrates

the total contribution that these four firms make public of their green tech efforts by filing patents.

In all but one year, 2009, Exxon has filed more green patents than each of the other three firms, at

times multiples more than the others combined. Exxon’s increasing trend in relative green tech

efforts (Figure 4) combined with the number of these patents (Figure 5) is suggestive of this firm’s

green effort: its stock of knowledge, V, and its annual contribution to this stock through R&D

expenditures, M. Interestingly, the peak of the combined green tech efforts during the sample

period of these four firms occurs in 2012 and has steadily declined. Referring back to Figure 1,

globally there has not been an overall decline in green tech effort. China has filed enough carbon

emission patents to compensate for the decline observed in Figure 5 by the US and UK. So while


Page 21 of 62

the issue of climate change persists – technology has yet to “solve” the problem – the collective

green tech efforts of the four major US and UK firms may have declined since 2012.

Insert Figure 5

Before bringing Tobin’s q into the discussion, the pressure on firms to address global

warming has intensified over time, which can be thought of as green pressure, a, in the model. A

reasonable proxy for this pressure is observed in shareholder proposals related to climate change,8

which may or may not come to a vote at annual meetings. As Buchanan, Netter and Yang (2010)

explain, shareholder proposals are quite different in the US and the UK. In the United States,

shareholder proposals are advisory only, regardless of vote outcome. In the United Kingdom,

shareholder resolutions are binding when they gather majority support. Proposals are common in

the US, rare in the UK. Broadly speaking, shareholder proposals are persuasive in the US and

coercive in the UK. Despite the differences, proposals in either country are explicit expressions

of owner concerns. No need to deduce or guess what the owner-agent conflict is. The conflict is

stated in publicly filed documents (Form DEF 14A with the SEC, or the Notice of Meeting in the

UK). Importantly, these notices are made, forms are filed and the annual meetings occur much

earlier than fiscal year end, which factors when considering the effect of time. Annual meetings

are generally held from April to June. The four major oil firms in the US and UK all held meetings

in late-May in 2019. Thus, a built-in lag exists between fundamental data and shareholder

proposals information.

Such concern expressed by shareholding investors helps to attribute the pressure toward

8 A proposal is considered to be related to climate change if the proposal uses the phrase “climate change” anywhere directly in the resolution. Although imperfect, this qualification is objective and unambiguous.


Page 22 of 62

value-relevance, as opposed to general, stakeholder desires (Deng et al., 2013; Renneboog, Ter

Horst, & Zhang, 2008a). Concern over climate change voiced by proposals should speak to firm

fortunes, at some point, if investors are rational. While the intensity of this concern or pressure

varies over time and between countries, there are some interesting dynamics which have taken

place at annual meetings of these four firms recently.

While Exxon received its first proposal related to climate change in 1996, it would not be

until 2017 that a majority of shareholders would support such a resolution. (No board or

management in the US has ever supported a proposal related to climate change.) Subsequent

proposals in 2018 and 2019 of a similar ilk in the US have fallen far short of majority support. A

proposal to create a climate change board committee gathered only 7.4% of the vote at Exxon’s

2019 annual meeting. Similar pressures have mounted and released at Chevron over the years. In

2018, “Chevron shareholders rejected two climate change resolutions at the oil giant's annual

meeting, upsetting activists who are pressuring fossil fuel companies to curb crude oil production

and reduce greenhouse gas emissions.”9 In 2019 at Chevron’s annual meeting, shareholders

rejected two proposals related to climate change: a proposal for a report on reducing carbon

footprint gathered 33.2% of the vote, while a proposals to create a climate change board obtained

only 7.6% of shareholder support.

In 2015, both UK oil firms received their first shareholder proposals related to climate

change and, surprisingly, the management of both firms supported these proposals. Both 2015

proposals received near unanimous shareholder approval: 98.91% of the vote for Shell’s

Resolution 21, and 98.28% for BP’s Resolution 25. Every year since 2015, Shell has received a

9 Siegel, J. May 30, 2018 02:33 PM. Washington Examiner, “Chevron shareholders reject climate change resolutions.” https://www.washingtonexaminer.com/policy/energy/chevron-shareholders-reject-climate-change-resolutions

https://www.washingtonexaminer.com/policy/energy/chevron-shareholders-reject-climate-change-resolutions


Page 23 of 62

similar shareholder resolution, but without management support these resolutions have gathered

only 2.78%, 6.34% and 5.54% of the vote from 2016 to 2018, respectively. In 2019, such a

resolution was withdrawn from Shell’s annual meeting. At BP’s annual meeting in 2019, however,

two resolutions on climate change were introduced. Management supported Resolution 22 which

received 99.14% of the vote, while Resolution 23 gathered only 8.4% support from other

shareholders without management’s approval. Clearly, not only is there wide variation in support

for green pressure among these four firms, but there is wildly divergent support for this pressure

for the same firm in the same year.

Taken together Figure 6 presents the number of proposals that these four firms have

experienced. Clearly, green pressure on all four firms by their shareholders has intensified and

subsided over time, with vote outcomes indicating a peak in 2015 in the UK and in 2017 in the

US, thus far at least.

The variation of green pressure in “climate change” shareholder proposals and green tech

efforts in carbon emission patents over two decades for these four direct competitors should be

priced in the market. Although the two largest firms in each country, Exxon and Shell, have

intensified their relative green tech efforts, so have their shareholders pressured them to address

climate change issues. Our theoretical model explains how Green Tobin’s q is a function of these

green efforts, but it remains to be seen if these additional green technologies gain firms a valuable

advantage and whether incremental shareholder pressure is beneficial to shareholder wealth.

Insert Figure 6


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5. Green Tobin’s q in the Oil Industry

In this section we perform econometric tests of the theoretical model with data from the oil

industry over the twenty-year period from 1998 to 2017 for the four US and UK firms discussed

above: Exxon, Chevron, BP and Shell. Table 1 describes the variables we use in our tests, how

they are calculated and the sources from which they are collected. Fundamental accounting and

year end stock price data is taken from Compustat and Datastream. The patent information is

collected from Google Patents. The shareholder proposal data is located with assistance from

SeekEdgar10 developed by Raj Srivastava and supplemented with text searches from the SEC

Edgar site, as well as reviewing firm websites. Other information (e.g. environmental abatement

cost) is collected from 10-Ks and company websites, as indicated.

Insert Table 1

The literature offers several versions of Tobin’s q. Chung and Pruitt (1994) test different

versions and show little empirical difference between their simple, conservative one and more

complicated versions (Lindenberg and Ross, 1981) that are computationally demanding, require

subjective assumptions and for which data may not be available. For these reasons, we follow the

literature (King and Lennox, 2002) and opt for the simple version of Tobin’s q, calculated as the

market value of equity plus the book value of preferred stock, long term debt and current liabilities

net of current assets, all scaled by the book value of total assets. As derived in section 3 above, q

10 https://www.seekedgar.com/

https://www.seekedgar.com/


Page 25 of 62

as a function of abatement A, R&D expenditures M, stock of knowledge V, firm’s capital stock k,

investments I, and stockholder proposals a.

𝑞 = 𝑞(𝑉, 𝑎, 𝐴, 𝑀, 𝑘, 𝐼) (12)

The green variables we are particularly interest in are Percent Carbon Emission Patents

(V), which is the ratio of Carbon Emission Patents to Total Patents, and Proposals (a), which is the

number of shareholder proposals per year that a firm receives containing the phrase “climate

change.” The variables are proxied as follows: Abatement (A) is environmental capital

expenditures scaled by assets.11 R&D (M) is scaled by assets. Capital stock (k) is the natural log

of assets. Investments (I) is capital expenditures scaled by sales.

Insert Table 2

Table 2 contains descriptive information about the four major oil firms in the US and UK

from 1998 to 2017. Tobin’s q ranges from well below unity (min .46) to more than double (max

2.26) with a mean just above unity (1.19) relating market values to replacement costs. On average

over time, the market views these four oil firms with opportunities to grow. The average US/UK

oil firm files patents on “carbon emissions” that are 14% of its total patents filed. As mentioned,

shareholder proposals are rare in the UK but common in the US. Shell received two proposals

related to climate change in 2019, while Exxon received six climate change proposals in 2016.

The pairwise correlations between these variables is presented in

Table 3.

11 The abatement costs could only be found for Exxon and Chevron. Consequently, abatement is only included in section 6. Robustness and Extensions.


Page 26 of 62

Insert

Table 3

The correlations of interest are those between Tobin’s q and green effort: the percent of

carbon emission patents and climate change shareholder proposals. A strong, negative correlation

exists between the percent carbon emission patents and Tobin’s q with an economic significance

of -0.357 and statistically significant at the 1% level. Green pressure has a weaker, positive

correlation with Tobin’s q of 0.257, marginally significant at the 5% level. Other correlations with

Tobin’s q are similar to the literature: negative with capital stock and investment, and positive with

R&D and abatement costs. Interestingly, there is no significant correlation between green pressure

(proposals) and green tech (percent carbon emission patents), either economically or statistically

(-.105), which lends credence to the proxies of green effort not capturing the same phenomena.

As Tobin’s q is the focus of our theoretical derivation and empirical conjecture,

understanding how q has trended over time for these four firms is critical to distilling the green

influences on it. Figure 7 (collectively) and Figure 8 (individually) exhibit the decline of Tobin’s

q for these four major petroleum firms over time. Figure 7 demonstrates the relative standing of

each firm’s q as competitors, where Exxon continues to hold its lead despite the downward trend.

Further, Figure 7 shows that only the trend for Exxon has a q above unity throughout the sample

period. Another interesting trend is the near identical average values of q that both British firms

have experienced over the sample period.

Insert Figure 7


Page 27 of 62

Figure 8 highlights a few important observations. First, although Exxon’s q remains above

unity, it continues a downward trend in 2017 and 2018, while those of the other three oil firms

have recently experienced upticks in their q (i.e. above the fitted trend line). If green tech effort

creates growth opportunities and green pressure is valuable, Exxon should be gaining an advantage

over its competitors, as Exxon has filed the greatest number carbon emission patents, has the

greatest increase in relative green efforts in the most recent years and has experienced the most

shareholder proposals. Yet, by comparing the data points (in blue) to the linear trend line (in red),

Exxon’s q appears to be declining at a greater rate than its historical average rate of decline and

the gap between Exxon’s q and Chevron’s q appears to be shrinking. Based on casual observation,

the coincidence of these trends calls for caution in the merit of green tech effort and the wealth

benefit of green shareholder pressure.

Insert Figure 8

The correlation of interest can also be view in Figure 9 and Figure 10, where Tobin’s q is

plotted against the Percent Carbon Emission Patents: a distinct negative relationship for the

industry leaders of each country, Exxon and Shell, an ambiguous relationship for Chevron and BP.

The strong negative correlation from

Table 3 may be attributable to the industry leaders of each country. In Figure 9, the four

competitors’ relationship of q to green tech effort is displayed together along with the average

(black line). In Figure 10, these same relationships are presented for each firm individually,

highlighting that different levels of green tech effort made little difference in q for BP and Chevron,


Page 28 of 62

while higher levels of green tech effort are associated with lower Tobin’s q for Exxon and Shell.

Insert Figure 9

Insert Figure 10

To combine the preceding associations over time for the major US and UK petroleum

firms, ordinary least squared regressions provide guidance. Table 4 addresses the impact on q that

green tech efforts and shareholder pressures have. The first two regressions reflect the correlations

established above: (1) a negative one between Green Patents and q, and (2) a positive correlation

between Green Proposals and q. When other variables are added to the regression, the coefficient

on Green Patents (the percent of carbon emission patents to total patents) retains significance at

the 5% level but becomes indistinguishable from zero when time and firm invariant factors are

added. The coefficient on Green Proposals (the number of shareholder proposals that mention

climate change) retains significance at the 1 percent level in all models. The initial correlations,

either displayed in the graphs or calculated in pairwise, continue be negative for Green Patents and

positive for Green Proposals when estimated by ordinary least square regressions.

Insert Table 4

To evaluate multi-collinearity, variance inflation factors (VIF) are calculated for regressors

in model 6 of Table 4, or the reciprocal of 1-R2 of each independent variable, i.e. the variance of

an independent variable unrelated to the other independent variables. In regression 6 of Table 4,

92.2% of the variation is explained. Table 5 presents the calculations for VIF.


Page 29 of 62

Insert Table 5

Consensus is that multi-collinearity is a cause for concern when variance is inflated 10

times or more. Table 5 reports that capital stock, k, raises concerns about collinearity, while the

average VIF for the entire model flirts too closely with the rule-of-thumb without some

transformation of the variables. Further, all variables are tested for their stationarity using the

Levin-Lin-Chu test, as there is a balanced panel and the sample is limited to the four US/UK firm

while time can expand, i.e. satisfying the their assumption that N number of firm be small relative

to T, time.12 Only for Capital Stock do we fail to reject the hypothesis that k contains unit roots

and conclude that the variable is non-stationary. To allow for the possibility of cross-sectional

correlations, we also specify the demean option for the Levin-Lin-Chu test, which fails to reject

the null for Capital Stock. These tests confirm the need to remove the trends from the variables.

To address multi-collinearity and ensure an accurate interpretation on the significance of the

coefficients, the independent variables are orthogonalized in Table 6.

Insert Error! Reference source not found.

Table 6 orthogonalizes the independent variables in an effort to separate variation in

sequence, i.e. to remove collinearity sequentially. Since Capital Stock displays an undesirable

variance inflation factor, it is orthogonalized first, with the other independent variables

orthogonalized in the order shown. In doing so, the relative Green Patents of these four US and

12 See https://www.stata.com/manuals13/xtxtunitroot.pdf p. 9.

https://www.stata.com/manuals13/xtxtunitroot.pdf


Page 30 of 62

UK firms are shown to negatively influence Tobin’s q with a level of significance at the 5% level

or better, until firm invariant factors are added to the regressions. Thus, with the elimination of

the strong time trend that still existed Table 4 through orthogonalization the steady-state

relationship of V: Green Patents emerges in Table 6. As in the preceding regressions, Green

Pressure positively impacts q in all specifications at the 1% level. When the variables are

orthogonalized, the overall decline in q over time for the major petroleum firms as shown in Figure

9 finds a reliable explanation in both green measures: as the percentage of carbon emission patents

increases, Tobin’s q decreases.

The preceding tables follow prior literature which considers environmental and financial

performance concurrently before addressing causation (Chappel et al, 2003; Dowell et al, 2000;

King and Lennox, 2002; Konar and Cohen, 2001; Lioui and Sharma, 2012; Iwata and Okada,

2011). Given the all-inclusive nature of Tobin’s q, prior observations of q might explain it better

than any of the explanatory variables. To identify the unique impact that Green Patents and

Proposals, Elsayed and Patton (2005) evaluate environmental performance and financial

performance by employing the Arellano and Bond (1991) estimation method. This procedure uses

a generalized method of moments (GMM) approach which takes lagged differences and uses them

as instruments for the endogenous variables, in this case the first two lags of Tobin’s q. Table 7

reports the results of the Arellano-Bond estimation.

Insert Table 7


Page 31 of 62

As Dowell et al., (2001) suggest, there is no a prior basis for suspecting which lags are

most appropriate for explaining Tobin’s q. Thus, several combinations of lags are offered in Table

7. Only the second lag of Green Patents indicates a reliably, negative impact on q in model 1.

With Green Proposals, a positive impact on q occurs concurrently, while a negative impact is

reliably estimated in models 1 and 2. To test identification, serial correlation occurs in the first

(instrumented) lag of Tobin’s q for models 1 and 2, but no such correlation exists in the second

lag of the differenced estimates, thus validating the inference of the GMM estimator in the first

two models only. Model 4 is the regression closest to the one specified by Elsayed and Patton

(2005), however the AR(1) statistic (at the bottom) is insignificant. Although the choice of lag

lengths has an impact on making any causal claims, the Arello-Bond estimation method confirms

the generally negative impact that Green Patents have on Tobin’s q and the positive one that Green

Proposals have on Tobin’s q. Green effort matters to q.

6. Robustness

Instead of carbon emission from Google Patents, we employ Patstat, the database for

“green patents” that Flammer (2018) uses to investigate the real impacts of green bond issues and

that Aghion et al (2016) use to examine carbon taxes for the auto industry. The Cooperative Patent

Classification (CPC) is an international system jointly developed by the US and European Patent

Offices and adopted throughout the world.13 Following Flammer (2018), we use the codes

believed to be most applicable to green effort: the Y02 series (technologies or applications for

mitigation or adaptation against climate change). The subclassifications of Y02 (A, B, C, D, E, P,

T and W) provide granularity as to the type of climate change patent. To get a sense of which of

13 See https://www.uspto.gov/patents-application-process/patent-search/classification-standards-and-development.

https://www.uspto.gov/patents-application-process/patent-search/classification-standards-and-developmenthttps://www.uspto.gov/patents-application-process/patent-search/classification-standards-and-development


Page 32 of 62

the Y02 patents are most numerous for Exxon, Chevron, BP and Shell, Figure 11 displays the

combined green effort of these firms for Y02 patents filed in the United States, Europe and Japan,

or the triadic patents, following Aghion et al (2016).

Insert Figure 11.

The most numerous are Y02P: CLIMATE CHANGE MITIGATION TECHNOLOGIES IN THE

PRODUCTION OR PROCESSING OF GOODS. Next are Y02E: REDUCTION OF

GREENHOUSE GAS [GHG] EMISSIONS, RELATED TO ENERGY GENERATION,

TRANSMISSION OR DISTRIBUTION. The remaining Y02 classifications comprise a small

fraction of the Y02 CPC classification. Like Flammer, we compare the number of green patents

to total patents and use this ratio as a variable of interest for in the Green Tobin’s q.

Insert Table 8

The OLS regressions in Table 8 replicate model 6 in Table 4, which include time and firm

invariant factors. Only Y02E patents allow inference distinguishable from zero. Here, as a percent

of total firm patents, climate change patents related to energy transmission, generation or

distribution have a negative impact on q that is significant at the 1% level or better, with 93% of

the variation explained by the model.

Insert Table 9


Page 33 of 62

Table 9 considers only the two major US firms, Exxon and Chevron, which provide

information about their worldwide environmental abatement costs in their annual 10K filings.

These abatement costs include both operating expenses and capital expenditures, which are scaled

by assets. As shown in Table 9, green patents remain significantly negative, green pressure

continues to be strongly positive, but only environmental capital expenditures have a significant

relationship with Tobin’s q once other controls are added in model 5, which is positive and

significant at the 5 percent level. By expanding the sample to include the major oil firms around

the world, our results are robust to our main findings: green tech effort has a negative relationship

with Tobin’s q, while green pressure has a positive relationship with Tobin’s q. By limiting the

sample to US firms only, our results are also robust and reinforce Table 8 in which our inference

survives firm invariant factors.

Overall, our results align with Eccles and Serafeim (2013) who explain how only major

innovations boost both ESG and financial performance. Therefore, we do not find it surprising

that green patents, on average, have a negative impact on Tobin’s q.

7. Concluding Remarks

The main purpose of this paper is to derive the Green Tobin’s q for the literature at the

intersection of environmental and financial performance. To this end, we put forward a dynamic

stochastic model of firm investment in which a representative firm invests in pollution abatement

and R&D in green technologies, investments that stockholders pressure their firms to address

environmental issues. Optimality conditions indicate that the firm’s Tobin’s q must reflect its

green efforts. The derived Tobin’s q is a function of pollution abatement efforts, stockholder


Page 34 of 62

proposals for green effort, R&D expenditures, stock of knowledge [given by patents in green

technologies], firm’s capital stock and investments. Using data from the oil industry this paper

also tests the derived model. Our empirical application of the Green Tobin’s q includes green

patents, green pressure and abatement costs.

As theorized, the Green Tobin’s q is a function of firm green efforts. Our results hold for

most of the empirical specifications, survive more of the causality exercises than the reverse, and

are reinforced by alternative data sources for the variables of interest. Regression results indicate

that patents and R&D of green technologies have a negative impact on Tobin’s q, while

stockholder pressure has a positive impact. Given the tailored sample but one over a lengthy period

at the epicenter of an important environmental issue, it may appear surprising that the green patents

for these oil firms deter investment, while stockholder proposals encourage it. However, this

finding makes sense once we consider what the Green Tobin’s q functions as: an integral of

maximized profits based on dynamic constraints and the chances of success or failure. Our

theoretical model and empirical evidence aligns with Manso’s (2011, p. 1824) suggestion to

encourage innovation: “shareholders may want to motivate a CEO to pursue more innovative

business strategies…[or] regulators may want to stimulate entrepreneurship, say, through the

design of…” clean energy subsidies and carbon taxes. Such motivation requires tolerance for loss

or the chance taken on innovation. Indeed, these green firm efforts – abatement, clean R&D and

knowledge – are some hard truths on oil and climate change that Ben van Beurden must also

balance, while the exogenous pressure from shareholders weighs in hopes of favor. The question

that the Green Tobin’s q hopes to answer is how seriously green effort should be taken. The

evidence we provide suggests that these firms may be taking green patents too seriously, while

firms would be wise to heed green stockholder proposals.


Page 35 of 62

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Figures

Figure 1 Collective Green Technology Effort over Time

This figure represents green tech effort over time by the major petroleum firms around the world that file carbon emission paten

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