Resources Policy 73 (2021) 102235

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Resources Policy
journal homepage: www.elsevier.com/locate/resourpol

Does green innovation damage financial performance of oil and

gas companies?
Tonje Marthinsen Aastvedt a, Niaz Bashiri Behmiri b, *, Li Lu a
a
University of Stavanger, UiS Business School, Norway
b
University of Trento, Department of Economics and Management, Italy

A R T I C L E I N F O A B S T R A C T

Keywords: This article investigates the effect of green innovation on financial performance of oil and gas companies. Using
Green innovation environmental pillar and environmental innovation scores to measure green innovation, the study estimates two
Financial performance panel datasets for the US and European oil and gas companies from 2010 to 2018. The results show that
Oil and gas industry
innovation score has a positive effect on financial performance of the US and European companies. The effect of
environmental pillar score is not linear. In the US, at low level of environmental pillar score, there is a positive
effect and at higher levels the effect turns to negative. In Europe, at low level of environmental pillar score, there
is a negative effect, which turns positive at higher levels. Moreover, for European companies, higher crude oil
prices negatively moderate the relationship between innovation score and financial performance. This result is
important for policy makers to create more effective regulations and support systems. Furthermore, it is
important for managerial board of companies to decide about the level of their green investment to develops
their environmental performance while maintaining their desired financial performance.

1. Introduction companies to invest further in green innovation activities is whether the

Energy production and consumption, especially fossil fuels,
contribute a big portion of global environmental emissions (United
Nations, 2009). Fossil fuel extraction, among all activities of human, is
the main contributor to build up the carbon compounds in the earth’s
biosphere (Heede, 2014). At 2017, petroleum industry directly
contributed about 8% of the total CO2 emission from fossil fuels through
its own operations (IEA,1 2019b, 2020a, 2020c) and also, due to its re­
leases of natural gas, this industry directly contributed at least about
14% of all known anthropogenic and natural emissions of the potent
warming gas (IEA, 2019a, 2019b, 2019c).
Despite the background of energy transition and high-speed growth
development of renewables, oil and gas will play an important role in
energy systems in near future. Therefore, the efforts to reduce envi­
ronmental emissions within oil and gas industry will have an important
impact on environment, and they are vitally important in enabling the
world to achieve the climate change target. To meet the requirement for
environmental-friendly oil and gas production, green innovation is an
important element. However, besides complying with regulations and
showing social responsibility, one of the most important motivations for
investment can create a win-win situation, to improve both environ­
mental and the financial performance (Dangelico and Pujari, 2010). The
unspecified impact of green innovation activities on financial perfor­
mance has made some companies reluctant to act in support of green
practices beyond complying with regulations.
Several studies have found that green innovation can bring impor­
tant benefits to the company. Porter and Van der Linde (1995) point out
that green innovation improves the environmental performance and
competitive advantage of the company, creating a win-win situation.
However, Palmer et al. (1995) challenge the win-win logic and sug­
gested that although investment in environmental management can
improve the environmental performance, it is hard to prove the cost is
well compensated from an economic perspective. In addition, Rennings
(2000) argues that green innovation creates technology knowledge ex­
ternalities and environmental externalities during the innovation pro­
cess. Because of the market failure, the reward on the investment in
green innovation for companies is less than their contribution to the
social benefits (Rennings, 2000; Oltra, 2008).
In this paper, the main goal is to examine the effect of green inno­
vation, measured by environmental pillar score and innovation score

* Corresponding author. Department of Economics and Management, University of Trento, Trento, E, Italy.
E-mail address: bashiri.niaz@gmail.com (N.B. Behmiri).
1
International Energy Agency.

https://doi.org/10.1016/j.resourpol.2021.102235
Received 9 October 2020; Received in revised form 16 June 2021; Accepted 6 July 2021
Available online 15 July 2021
0301-4207/© 2021 Elsevier Ltd. All rights reserved.
T.M. Aastvedt et al.
reported by Refinitiv, on financial performance of oil and gas com­
panies. We include the major oil and gas companies headquartered in
the US and Europe. To achieve this, first, we examine the effect of green
innovation scores on the return on assets of oil and gas companies.
Second, we examine whether there exists a curvilinear relationship be­
tween these scores and financial performances. This enables us to un­
derstand whether this effect depends on the level of green innovation
activities in a company. Third, we examine the moderating effect of
crude oil price on the relationship between green innovation and
financial performance.
This paper has several contributions to the literature investigating
the association between companies’ green innovation activities and
financial performance. First, to best of our knowledge, no previous study
examines this relationship in oil and gas industry. There is an increasing
request from stakeholders to oil and gas producers to increase their
emission reduction performance. Furthermore, global energy transition
towards clean energies will gradually decrease demand for fossil fuels.
However, the unclear financial outcome of all sorts of energy transition
makes them an unwelcome investment for some companies. Although
contribution of oil and gas companies in improving their environmental
performance is essential; however, their profitability and survival are
important as well. Thus, finding the expected effect of environmental
and green activities on profitability of oil and gas companies is a central
element for their future managerial decision regarding investing on
green innovation activities. As the second contribution, we consider that
the effect of green innovation activities on oil and gas companies can
vary depending on the level of activity. Third, we consider for the first
time the moderating role that oil price have on this relationship. Oil
price determines financial performance of oil and gas companies and
therefore higher oil price would rise the opportunity cost of green in­
vestments for these companies. Increasing oil price would increase the
profitability of oil extraction and production and neglecting the effect of
oil price on the association between green innovation activities and
financial performance would generate biased outputs. Fourth, we
distinguish the study based on the oil and gas companies’ geographical
location, this is important due to different allocated environmental
policies in the US and Europe.
Applying two panel datasets collected from 2010 to 2018, we find
that in the US companies, innovation score has a positive effect on return
on assets. However, the effect of environmental pillar score is curvi­
linear, as at low level of this score, it has a positive effect on return on
assets and at higher levels, the effect turns to negative. In European
companies also the effect of innovation score is positive. However, the
effect of environmental pillar score is curvilinear, as at lower levels,
there is a negative effect on return on assets, which turns positive at
higher levels of this score. Moreover, only for European companies,
higher crude oil price has a negative moderating effect on the rela­
tionship between innovation score and return on assets. This indicates
that higher crude oil price can discourage the European companies to
invest in green innovative projects, while lower crude oil prices are in
favor of environmentally friendly decisions.
These results help policy makers to create more effective regulations
and support systems for oil and gas companies to encourage them to
invest more on green innovation projects. Moreover, it helps oil and gas
company managers to have a wider understanding of the relationship
between green innovation activities and financial performance. Thus,
with the right investment decisions on green innovation projects, the
environmental performance of a company can improve while main­
taining the desired financial goals.
The paper is organized into six sections. Section 2 provides a back­
ground and hypotheses. Section 3 introduces model. Section 4 discusses
the methodology and results. Section 5 concludes the paper.
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Resources Policy 73 (2021) 102235
2. Background and hypotheses
2.1. Theoretical background
There are several theories that explain the effect of environmental
performance on financial performance of companies. One is the
ecological modernization theory, which explains that cost minimization
and competition for innovation would lead to an ecological-economic
‘win-win’ solution (Lin et al., 2019). This theory assumes that techno­
logical innovation supports the companies to develop their economy and
environmental dimensions and argues that the efforts to have a better
environmental performance increases companies’ environmental pro­
ductivity, which improves financial performance. In this regard, Nishi­
tani et al. (2011) find that if companies reduce their environmental
pollution, there would be an increase in demand and productivity that
develops their financial performance. Therefore, Higher rate of green
innovation achievements leads to cost reduction by avoiding waste in
raw materials, reducing environmental cost, and improving productivity
(Dai and Zhang, 2017). Furthermore, with higher CO2 emission tax,
companies producing environmental-friendly products face lower tax
rates.
Another theory that explains the effect of environmental perfor­
mance on financial performance is the stakeholder theory. Modern
stakeholder theory argues that in addition to the shareholders, for a
company to survive and stays in the market, there are other parties who
should be pleased. This can include, but not limited to, public, govern­
ment, political groups, communities, trade unions, investors, financial
institutions, and environmentalists. Stakeholder theory claims that
corporate social performance of companies will affect their image,
brand, trust, reputation, and cost reduction. This improves the com­
pany’s competitive advantage and financial performance (see e.g., Russo
and Fouts, 1997; Miles et al., 1997; Miles and Covin, 2000; Porter and
Kramer, 2006, 2011). In this regard, several studies find a better
financial performance for socially responsible companies (see e.g.,
Chang et al., 2019; Albuquerque et al., 2019). This effect would happen
through various channels. For instance, a group of studies suggest that
social responsibility of companies positively affect socially responsible
investors decision (see e.g., Merton, 1987; Heinkel et al., 2001; Gollier
and Pouget, 2009; Chava, 2014). In this regard, Chang el al. (2019) show
that socially responsible companies have a higher cash balance. How­
ever, empirical studies are not always in support of this argument; for
example, Brutscher et al. (2021) examine the effect of higher level of
energy efficiency on capacity of companies to obtain loans in European
Union countries and find no effect.
In the following, we review the literature that examine financial
performance-green innovation relationship and we develop the
hypotheses.
2.2. Literature review and hypotheses
2.2.1. Green innovation and financial performance
An extensive body of literature have shown that a higher green
innovation rate has a positive effect on companies’ performance. Li
(2014) investigates manufacturing companies in China and finds that
green innovation has a positive effect on environmental performance,
and it has a positive effect on financial performance through the medi­
ating role of environmental performance. Lee and Min (2015) use a
sample of Japanese manufacturing companies and find that the invest­
ment in green innovation reduces carbon emission and improves
financial performance. Studying publicly traded companies in Poland
and Hungary, Przychodzen and Przychodzen (2015) point out that
eco-innovative companies have higher returns on asset and equity. They
argue that companies investing in green innovation perform better due
to attracting green rents in the market. Huang and Li (2017) find that
both green product and green process innovation positively affect
financial performance of information and communication technology
T.M. Aastvedt et al.
industry in Taiwan. Liao (2018) utilizes a sample of manufacturing
companies in China and finds that green innovation has a positive effect
on financial performance. The author indicates that different types of
culture, such as clan, adhocracy, and market cultures, play an important
role in promoting green innovation within companies. Lin et al. (2019)
find that green innovation has a positive effect on financial performance
in automotive sector. They also find that the small-size companies
achieved a higher return from green innovation than large-size ones. de
Azevedo Rezende et al. (2019) perform an analysis on multinational
companies and show that green innovation has a positive effect on
financial performance on a 1-3-year time-lag basis. Xie et al. (2019)
conclude that both green process and green product innovation improve
financial performance in heavily polluting Chinese manufacturing in­
dustries. They also find that the green product innovation moderates the
relationship between green process innovation and financial perfor­
mance, and the green image mediates the relationship between green
product innovation and financial performance.
Innovation can also have a negative effect on financial performance.
Walley and Whitehead (1994) argue that the “win-win” logic of green
practices on environmental and financial performance is questionable.
Especially when relatively easy environmental problems have already
been solved, while the remaining ones are too expensive to touch. For
industries facing fierce competition and low margins, it is hard to
persuade shareholders to allocate resources on green innovation with
uncertain returns (Walley and Whitehead, 1994). Due to the complexity
and risk during innovation process, companies that allocate resources to
make innovation efforts may face increased operation costs (de Oliveira
et al., 2018). Agulera-Caracuel and Ortiz-de-Mandojana (2013) compare
green innovative and non-green innovative companies globally and find
that green innovative companies do not have better financial perfor­
mance than their counterparts do. However, when examining within the
group of innovative companies, they show the intensity of green inno­
vation is positively related to company profitability. Forsman et al.
(2013) indicate that companies with little control on cost-efficiency, low
level of customer relationship, and low capability of responding to
declining competitiveness, usually result in unsuccessful eco-innovators.
In addition, using German data, Rexhäuser and Rammer (2014) show
that if green innovation only improves environmental performance
without simultaneously improving resource efficiency, financial per­
formance will not be improved.
However, too much innovation investment might affect other oper­
ational activities by using too many resources, and the relationship is
expected to have an inverted U-shaped (Wagner, 2005). Bontis et al.
(2005) explore the relationship between innovation capital (R&D in­
tensity) and financial performance among largest companies in Taiwan
and identified an inverted U-shape relationship. Their study finds that
over investing in innovation will have a negative impact on company’s
financial returns. This result has also been explored in the environ­
mental performance literature. For example, using a sample of global
companies in carbon-intensive industries, Misani and Pogutz (2015)
identify that companies’ environmental outcomes, have a curvilinear
inverted U-shaped relationship with Tobin’s q. Their findings also sug­
gest that companies investing in both reducing carbon footprints and
sustained green process innovations are rewarded with a better financial
result. However, Ramanathan (2018) in a study that apply data from UK
manufacturing companies shows positive effects from both the envi­
ronmental performance variable and the squared term of it on com­
panies’ financial performance. This suggests the relationship is positive
and nonlinear, where higher environmental performance has an
increasing effect on financial performance.
Innovation can also be high risk, especially for new or disruptive
product innovation, where companies historically have reported a high
rate of failure (Crawford, 2008). This suggests that if companies are to be
successful, they must invest sufficient funds in their innovation activities
to gain financial benefits, implying a U-shaped relationship (Tidd and
Bessant, 2018). Trumpp and Guenther (2017) apply a data of
3
Resources Policy 73 (2021) 102235
international service and manufacturing companies and find a U-shaped
relationship between environmental and financial performance. They
argue that there must be a minimum level of commitment before the
relationship becomes positive. However, there is little evidence from
other empirical studies supporting this claim.
Fossil-fuel extraction is the main contributor to build up the carbon
compounds in the biosphere of the earth, also oil and gas companies
massively invest on research and development to mitigate their pollu­
tion. Despite this, to best of our knowledge, no previous study examined
the effect that higher green innovation rate can have on financial per­
formance of oil and gas companies. In this study, following the litera­
ture, we argue that, the effect of green innovation activities on financial
performance of the US and Europe based oil and gas companies is pos­
itive with a decreasing rate, and we develop the first hypothesis:
Hypothesis 1. The positive effect of green innovation activities on
financial performance of the US and European oil and gas companies is
weakened as the level of green innovation activities increases.
2.2.2. Moderating role of crude oil price
Crude oil price has a positive effect on financial performance of oil
and gas companies (see e.g., Boyer and Filion, 2007; Dayanandan and
Donker, 2011). Therefore, it is an important factor for projects valuation
within oil and gas companies. Changes in crude oil price affects the
decisions in green innovation investment within these companies.
Higher crude oil price provides a cushion for the companies to take risk
on investments in (green) innovation as they can obtain higher benefit
elsewhere. However, low crude oil price and high growth rate of alter­
native energy development might urge oil and gas companies to make a
change and innovate to survive by increasing production efficiency,
reducing cost, and meeting the long-term energy demand (Rassenfoss
and Henni, 2015).
We argue that higher crude oil prices, increases the opportunity cost
of improving oil and gas companies’ green innovation activities and
therefore, the positive effect of higher green innovation on financial
performance would be weaker when the oil prices are high. Therefore, in
this study, we examine whether crude oil price has a moderating effect
on the strength of the relationship between green innovation activities
and financial performance of oil and gas companies, and we develop the
second hypothesis:
Hypothesis 2. Crude oil price has a negative moderating effect on the
relationship between green innovation activities and financial perfor­
mance of the US and European oil and gas companies.
Diagram of the conceptual model is illustrated in Fig. 1.
3. Model selection and data
3.1. Model selection
To explore the hypotheses, we add the independent variables in a
stepwise process to evaluate model fit. In all models, i denotes the in­
dividual companies and t denotes the time, ai is the fixed effect and δt
represents the year dummies.
Model 1 contains the control variables, including company size,
leverage, oil price and the 2014–2015 oil price shock:
( )
Financial performanceit = α0 + δt + α1 log sizei,t− 1 + α2 leveragei,t− 1
( ) /
+ α3 log oil pricei,t + α4 Year14 15t + ai + εi,t
(1)
Model 2 is a simple regression containing green innovation variables:
Financial performanceit = α0 + δt + α1 green innovationi,t− 1 + ai + εi,t (2)
Estimating Models 1 and 2 enables to observe if multicollinearity
would affect the estimated coefficients and if there is any strong medi­
ating effect between explanatory and control variables.
T.M. Aastvedt et al.
Fig. 1. Diagram of the conceptual model.
Model 3 introduces green innovation variables along with control
variables to measure the linear impact of green innovation level of
companies on the financial performance while controlling for com­
panies’ characteristics and crude oil price:
( )
Financial performanceit = α0 + δt + α1 log sizei,t− 1 + α2 leveragei,t− 1
( ) / + α6 green innovation2i,t− 1
+ α3 log oil pricei,t + α4 Y14 15t
+ α5 green innovationi,t− 1 + ai + εi,t
Model 4 includes the quadratic term of green innovation variables.
This allows to explore if there is a curvilinear relationship between green
innovation and the financial performance (Hypothesis 1):
( )
Financial performanceit = α0 + δt + α1 log sizei,t− 1 + α2 leveragei,t− 1
( ) /
+ α3 log oil pricei,t + α4 Year14 15t
+ α5 green innovationi,t− 1
+ α6 green innovation2i,t− 1 + ai + εi,t
Model 5 adds the interaction between green innovation and crude oil
price to investigates the moderating effect of crude oil price on the
strength of the relationship between green innovation and financial
performance (Hypothesis 2):
( )
Financial performanceit = α0 + δt + α1 log sizei,t− 1 + α2 leveragei,t− 1
( ) /
+ α3 log oil pricei,t + α4 Y14 15t
+ α5 green innovationi,t− 1
( ( ))
+ a6 green innovationi,t− 1 × log oil pricei,t
+ ai + εi,t
Model 6 contains all variables used in the previous models. This
model is included as a robustness check to avoid any omitted variable
bias and to validate the results in previous models (Hypotheses 1 and 2):
Resources Policy 73 (2021) 102235
( )
Financial performanceit = α0 + δt + α1 log sizei,t− 1 + α2 leveragei,t− 1
( ) /
+ α3 log oil pricei,t + α4 Year14 15t
+ α5 green innovationi,t− 1
( ( ))
+ a7 green innovationi,t− 1 × log oil pricei,t
(3)
+ ai + εi,t en innovation2i,t− 1
( ( )
+ a7 green innovationi,t− 1 × log oil pricei,t
+ ai + εi,t
(6)
3.2. Data
3.2.1. Data collection and samples
(4) Data are collected from the Refinitiv Datastream database for the
period from 2010 to 2018. We consider three sample selection criteria to
collect data. First, companies must belong to the oil and gas industry
according to the Thomson Reuters Business Classification (TRBC) the
industry group classification. Second, companies must have their
headquarters in either the US or the European region. Third, companies
must have reported environmental scores for the period from 2010 to
2018 and companies with no reported data or several missing values are
excluded from the sample. For the US companies, the sample consists of
27 and for Europe 17 companies.
3.2.2. Definitions of variables
(5)
3.2.2.1. Dependent variable. To quantify financial performance, we use
the return on assets (ROA) as a profitability ratio of a company. In
previous literature, ROA is widely used as a measure of companies’
financial performance (see e.g., Lin et al., 2019; de Azevedo Rezende
et al., 2019; Xie et al., 2019). Since oil and gas companies are generally
capital intensive, ROA is more appropriate as a profitability measure
compared to, for example return on equity, as it shows how assets or
resources are used to generate income as opposed to investments
(Merrow, 2012).
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T.M. Aastvedt et al. Resources Policy 73 (2021) 102235

3.2.2.2. Explanatory variables. Refinitiv reports three corporate social
responsibility (CSR) pillar scores, including Environmental, Social and
Governance (ESG) scores. In this study, we only focus on the environ­
mental pillar score reported by Refinitiv.
The environmental pillar score contains information for three cate­
gories including a) resource use, b) emission reduction and c) innovation
scores of a company. Refinitiv (2020) indicates that the a) resource use
score shows performance and capacity of a company to reduce mate­
rials, energy or water use, and improving supply chain management to
find more eco-efficient solutions, b) emission reduction score measures
commitment and effectiveness of a company to reduce environmental
emissions in production and operational processes, and c) innovation
score measures capacity of a company to reduce the environmental costs
and burdens for its customers; therefore, it creates new market oppor­
tunities via new environmental technologies and processes or
eco-designed products. To calculate the final environmental pillar score,
the three categories are weighted in terms of relative importance for the
industry group (Refinitiv, 2020).
In this study, we apply environmental pillar score, and the third sub-
category of this score, which is c) innovation score, to measure green
innovation activities of an oil and gas company.
To answer the hypotheses, each analysis for the panel of US and
Europe companies will be performed twice, using environmental pillar
score and innovation score as the key explanatory variables. In all an­
alyses, the key explanatory variables will be included with a one-year
lag. This is to make sure the benefits, as well as the costs of the invest­
ment are considered.
3.2.2.3. Nonlinear components. We expand the analysis with additional
variables to capture the curvilinear effects of the key variables, and
moderating effect of crude oil price. The quadratic term of the green
innovation variables is to examine if there is an evidence of curvilin­
earity, how this relationship is shaped, and where the hypothetical
turning point is located. Second, to explore the hypothesis of a possible
moderating effect of crude oil price on the relationship between green
innovation and companies’ financial performance, an interaction term
of the green innovation variables and crude oil price will be included to
the models.
the logarithm of Brent crude price, both obtained as the annual average
price in $US per barrel.
A Dummy variable for the 2014–2015 oil crisis is included in the
models that takes the value of 1 for the years 2014 and 2015 and
0 otherwise.
3.2.3. Descriptive statistics and variance inflation factors
For the US companies, the panel consists of 243 and for Europe 153
total observations. Table 1 reports the descriptive statistics for both
samples.
The panel of European companies have a higher mean value of
innovation score and environmental pillar score compared to the panel
of US companies. The European region has a wider range of innovation
scores with a higher overall standard deviation than the US. We report
the Variance Inflation Factor (VIF) test results in Table 2.
The results show all the VIF values are smaller than rule of thumb 10,
indicating there is no concern about multicollinearity. In addition, we
include a simple regression model containing only the green innovation
scores in the results section. Thus, we will be able to observe how the
significance levels of the estimated coefficients change between the
models and see if the correlation affects any of the results.
4. Methodology and empirical results
4.1. Estimation method
For estimations, we apply a fixed effects method that enables us to
control for company-level heterogeneity. We include both company and
year fixed effects. This rules out potential endogeneity from unobserved
factors that might affect both environmental performance and financial
performance of companies over time and across companies. We use the
Sargan-Hansen test of over-identifying restrictions, which shows the
fixed effect method is preferred to the random effect. Moreover, we
apply cluster-robust standard errors to validate all test statistics
regardless of serial correlation and heteroskedasticity issues.
4.2. Empirical results and discussion

4.2.1. Empirical results

3.2.2.4. Control variables. Company size has shown an important impact
on corporate financial performance, as it affects the company’s capital
4.2.2.1. US panel. Tables 3 and 4 report the results from estimating
structure (Kurshev and Strebulaev, 2015). Studies have found a positive
models 1–3 and models 4–6, respectively, for the US data sample. The
impact from size on performance, as larger companies might be in the
models, except for model 2, are overall statistically significant at the 1%
position to benefit from economies of scale, which would lower the cost
level.
of large-scale production (Miller, 1978; Xie et al., 2019). However, some
In Model 1, the coefficients of all control variables are statistically
studies have also found that small-sized businesses have higher invest­
significant. The coefficient for company size shows that a 1% increase in
ment returns than those of a larger size, which results in a negative
company size is expected to decrease ROA by − 0.062 percentage points
relationship (see e.g., Bagirov and Mateus, 2019; Lin et al., 2019). In this
study, the natural logarithm of total assets ($US) will be used to measure
company size. The variable will be included with a one-year lag. Table 1
Descriptive statistics for panel data.
Leverage ratio/Gearing is measured as the percentage ratio of total
debt to total capital (both in $US) and is included to account for the Mean Std. Dev. Min Max
company risk level. A high leverage ratio indicates that the company’s US panel
profitability might be lowered due to debt interest, while a low ratio ROA 1.32 15.716 − 119.83 59.53
signifies risk-averse attitudes or tight operating margins (Haniffa and log(size) 16.45 1.484 13.342 19.672
leverage 43.914 64.127 0 851.62
Hudaib, 2006). In previous literature, there is no consensus about the
log(oil price) (WTI) 4.261 0.31 3.768 4.585
direction of the leverage ratios effect on financial performance (see e.g., Environmental pillar score 51.128 22.854 17.63 97.01
Bagirov and Mateus, 2019; Lin et al., 2019). The variable is included Innovation score 47.959 19.851 36.43 96.77
with a one-year lag as the leverage ratio’s effect is usually lagged Europe panel
(González, 2013). ROA 2.654 10.205 − 41.69 62.7
log(size) 16.448 2.084 12.192 19.869
Crude oil price is one of the central drivers for financial performance Leverage 31.455 20.336 0 114.11
in oil and gas companies, as the components of revenue are based on log(oil price) (Brent) 4.342 0.344 3.776 4.715
product price and quantity of sales (Bagirov and Mateus, 2019). For the Environmental pillar score 69.071 19.926 20.02 97.38
US panel, we apply the logarithm of West Texas Intermediate (WTI) Innovation score 60.852 26.932 0.18 99.71
Cushing Oklahoma crude oil price, and for the European panel, we use
Std.Dev is the standard deviation.

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T.M. Aastvedt et al. Resources Policy 73 (2021) 102235

Table 2
Variance inflation factors.
Dependent variable: ROA Environmental pillar score Innovation score Environmental pillar score Innovation score

US panel Europe panel

Log(size) 3.77 1.95 3.42 2.58
leverage 1.22 1.76 1.08 1.08
log(oil price) 1.09 1.06 1.07 1.06
Environmental pillar score 3.48 – 3.37 –
Innovation score – 1.76 – 2.54
Mean VIF 2.12 1.40 1.99 1.66

on average in the consecutive year. The estimation suggests a negative
relationship, which Bagirov and Mateus (2019) also found in their study.
The coefficient for the leverage ratio shows that if leverage ratio is
increased by 1 percentage point, ROA is expected to increase by 0.075
percentage point in the following year. This is in line with Lin et al.
(2019), while it contradicts findings of a negative effect from some other
studies (see e.g., Bagirov and Mateus, 2019). When crude oil price is
increased by 1%, ROA is predicted to increase by 0.213 percentage
point. The coefficient for the 2014 and 2015 crude oil price crisis
dummy shows that on average, annual ROA decreased by 8.448 per­
centage points during this period, compared to the other periods in the
sample. All estimated effects are ceteris paribus.
In Model 2, both green innovation measures, including environ­
mental pillar score and innovation score are statistically insignificant in
the simple regression estimations. However, in model 3, when we add
the key variables together with the control variables, the coefficients of
innovation score and environmental pillar score become positive and
significant. Innovation score is significant at the 10% level and when this
score increases by one unit, ROA is expected to increase by 0.097 per­
centage point in the next year. Environmental pillar score is positive and
significant at the 1% level, and when this score increases by one unit,
ROA is predicted to increase by 0.310 percentage point in the next year.
In model 3, the within value of R-squared is higher in the model
including environmental pillar score than the one includes innovation
score. For the between values of R-squared which captures variation
between individuals, there is an even larger difference in favor of the
environmental pillar score. Overall, we see that, in model 3, the esti­
mation including environmental pillar score better explains the varia­
tion in the dependent variable both within and between the companies.
Therefore, in the linear model estimations, the results show that the
green innovation variable that includes both sustained and disruptive
innovation, within the categories of green innovation, emissions
reduction, and resource use, better explains the amount of variation in
return on asset.
In model 4, we measure the curvilinear effect of the key variables by
introducing quadratic terms. Both coefficients related to the green
innovation scores are jointly significant with their quadratic terms, at
the 10% level for innovation score and the 1% level for environmental
pillar score. However, for innovation score, the coefficient of the
quadratic term is not statistically significant, indicating no curvilinear
relationship between innovation score and ROA. As the estimated co­
efficient was positive and significant in model 3, the results indicate a
positive and linear effect from innovation score on ROA. The quadratic
term of environmental pillar score is significant at the 5% level, and the
coefficient sign is negative, together with positive sign of environmental
pillar score, it means there is a positive diminishing effect on ROA or a
curvilinear inverted U-shape relationship. The turning point is given by
⃒ ⃒
⃒ 0.866 ⃒
⃒2*0.005⃒ = 86.6 and shows that after environmental pillar score reaches
⃒ ⃒
86.9, each additional unit decreases the company’s annual financial
performance.
In model 5, we measure the moderating effect of crude oil price on
the strength of the relationship between green innovation and com­
panies’ financial performance. We find that environmental pillar score
and its interaction term with crude oil price are jointly significant at the
1% significance level. However, the interaction terms are not significant
in both estimations. Thus, there is no strong evidence for moderating
effect of crude oil price. The estimation results conclude that the US
company’s innovation and environmental pillar scores are independent
of crude oil price. The results in model 6 confirm that the estimation
results in models 1 to 5.
4.2.2.2. Europe panel. Tables 5 and 6 report the results from estimating
models 1–3 and models 4–6, respectively, for Europe data sample. All
models are statistically significant at the 1% level, except model 2 that
includes environmental pillar score.
Model 1 includes only the control variables. The coefficients for
company size and the leverage ratio are not statistically significant. The
coefficient of crude oil price is significant at the 1% level. This means
that when Brent crude oil price increases by 1%, ROA is expected to
increase by 0.070 percentage point on average in the same year. The
coefficient of the 2014–2015 dummy variable is significant at the 1%
level and shows that European oil and gas companies’ ROA was on
average 9.262 percentage points lower than during the crude oil crisis.

Table 3
US estimation results for linear models.
Dependent variable: ROA Model 1 Model 2 Model 3

Controls Environmental pillar score Innovation score Environmental pillar score Innovation score

log(size) − 6.196* (3.391) − 9.318** (3.624) − 7.743** (3.315)

leverage 0.075*** (0.020) 0.661*** (0.020) 0.071*** (0.019)
log(oil price) 21.255*** (2.930) 23.441*** (3.457) 21.077*** (2.972)
Y2014/2015 − 8.448*** (1.764) − 7.435*** (1.829) − 8.031*** (1.740)
Environmental pillar score − 0.072 (0.084) 0.310*** (0.094)
Innovation score 0.081 (0.067) 0.097* (0.057)
Constant 11.269 (50.817) 5.005 (4.272) − 2.532 (3.231) 37.749 (48.521) 33.013 (47.352)
n 242 242 242 242 242
F 24.57*** 0.73 1.44 21.38*** 18.45***
R-squared(within) 0.352 0.001 0.002 0.378 0.362
R-squared(between) 0.311 0.046 0.122 0.420 0.281
R-squared(overall) 0.079 0.002 0.010 0.104 0.076

Robust standard errors in parenthesis. *p ≤ 0.10, **p ≤ 0.05, ***p ≤ 0.01.

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T.M. Aastvedt et al. Resources Policy 73 (2021) 102235

Table 4
US estimation results with nonlinear components.
Dependent variable: ROA Model 4 Model 5 Model 6

Environmental pillar Innovation score Environmental pillar Innovation score Environmental pillar Innovation score
score score score

log(size) − 9.436** (3.522) − 7.394** − 9.292** (3.496) − 7.661** − 9.335** (3.408) − 7.007**
(3.317) (3.280) (3.253)
leverage 0.065*** (0.019) 0.071*** 0.066*** (0.019) 0.702*** 0.065*** (0.018) 0.073***
(0.019) (0.019) (0.019)
log(oil price) 24.784*** (3.893) 21.574*** 24.104** (8.875) 23.807*** 27.477** (10.215) 29.012***
(2.968) (6.754) (8.858)
Y14/15 − 7.466*** (1.831) − 7.882*** − 7.434*** (1.831) − 8.043*** − 7.464*** (1.827) − 7.840***
(1.753) (1.737) (1.710)
Environmental pillar score 0.866*** (0.304) 0.365 (0.642) 1.107 (0.866)
Environmental pillar score2 − 0.005** (0.002) − 0.006** (0.003)
Environmental pillar score × log(oil price) − 0.012 (0.133) − 0.049 (0.146)
Innovation score 1.113 (0.658) 0.342 (0.453) 2.260 (1.570)
Innovation score2 − 0.008 (0.005) − 0.012 (0.008)
Innovation score × log(oil price) − 0.056 (0.103) − 0.148 (0.155)
Constant 22.235 (45.394) − 2.078 34.343 (42.530) 19.733 8.014 (43.310) − 54.324
(55.246) (44.452) (72.337)
n 242 242 242 242 242 242
F 16.91*** 17.52*** 17.79*** 15.82*** 14.51*** 16.06***
R-squared(within) 0.385 0.365 0.378 0.362 0.386 0.368
Rsquared(between) 0.464 0.29 0.422 0.281 0.474 0.296
Rsquared(overall) 0.082 0.076 0.105 0.079 0.084 0.082
Joint sig F-test between all terms involving 5.83*** 2.72* 6.44*** 1.58 4.58** 1.84
green innovation scores

Robust standard errors in parenthesis. *p ≤ 0.10, **p ≤ 0.05, ***p ≤ 0.01.

Table 5
Europe estimation results for linear models.
Dependent variable: ROA Model 1 Model 2 Model 3

Controls Environmental pillar score Innovation score Environmental pillar score Innovation score

log(size) 0.651 (4.275) 0.567 (4.105) 0.601 (4.312)

leverage 0.028 (0.049) 0.027 (0.052) 0.028 (0.050)
log(oil price) 6.981*** (1.735) 7.042*** (1.826) 7.024*** (1.760)
Y14/15 − 9.262*** (2.458) − 9.277*** (2.451) − 9.276*** (2.461)
Environmental pillar score 0.028 (0.702) 0.063 (0.139)
Innovation score 0.055*** (0.018) − 0.013 (0.019)

Constant − 37.189 (70.938) 0.702 (11.341) − 0.723 (1.076) − 40.372 (74.062) − 35.78 (71.760)
n 153 153 153 153 153
F 9.5*** 0.03 9.85*** 7.86*** 7.98***
R-squared(within) 0.226 0.000 0.003 0.228 0.227
R-squared(between) 0.217 0.086 0.142 0.161 0.205
R-squared(overall) 0.225 0.006 0.012 0.21 0.225

Robust standard errors in parenthesis. *p ≤ 0.10, **p ≤ 0.05, ***p ≤ 0.01.

The result is consistent with previous studies where shocks on the crude
oil price are found to have a significant impact on company financial
performance in the European oil and gas industry (see e.g., Bagirov and
Mateus, 2019).
In model 2, the coefficient of innovation score is positive and sig­
nificant at the 1% level; however, the coefficient of environmental pillar
score is insignificant. Model 3 adds the key variables of the green
innovation scores along with the control variables. The estimation result
shows that both estimated coefficients for innovation score and envi­
ronmental pillar score are insignificant, which implies that green inno­
vation has no linear effect on European oil and gas companies’ financial
performance.
Model 4 adds the quadratic term to explore if there is any curvilinear
effect. The result shows that there is no significant curvilinear rela­
tionship between innovation score and ROA. However, the coefficient of
environmental pillar score is negative and significant at the 5% level,
while the coefficient of its quadratic term is positive and significant at
the 5% level. The two variables are jointly significant at the 10% level.
Therefore, there is a curvilinear U-shaped relationship between envi­
⃒ ⃒
⃒ .956 ⃒
ronmental pillar score and ROA, with a turning point of ⃒⃒2*.009⃒ = 53.11 .
⃒
In other words, environmental pillar score has a negative but increasing
effect on ROA. This means that when environmental pillar score is lower
than 53.11, the effect of one additional unit of environmental pillar
score on financial performance is negative but when the score becomes
higher than 53.11, the effect turns positive. The U-shaped relationship
shows that European oil and gas companies should invest sufficient
funds in green innovation practices to gain financial benefits.
Model 5 includes an interaction term of crude oil price and the key
variables. The result shows that the coefficient of innovation score has a
positive effect on ROA, which is significant at the 10% level. The coef­
ficient of interaction term of innovation score and crude oil price is also
significant at the 10% level. The result indicates that there exists an
evidence for moderating effect of crude oil price on the strength of the
relationship between the innovation score and the oil and gas com­
panies’ financial performance, where an additional percentage increase
in crude oil price will lower the positive effect of the previous year’s
innovation score on ROA. The coefficients for environmental pillar score
and its interaction term with crude oil price are not statistically

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T.M. Aastvedt et al. Resources Policy 73 (2021) 102235

Table 6
Europe estimation results with nonlinear components.
Dependent variable: ROA Model 4 Model 5 Model 6

Environmental pillar Innovation Environmental pillar Innovation Environmental pillar Innovation

score score score score score score

log(size) 1.563 (4.060) 0.607 (4.325) 0.400 (4.092) 0.417 (4.000) 1.399 (4.079) 0.424 (4.018)
leverage 0.028 (0.051) 0.032 (0.049) 0.041 (0.048) 0.049 (0.046) 0.041 (0.048) 0.053 (0.045)
log(oil price) 7.935*** (1.954) 7.068 *** 14.303 (8.682) 14.231*** 14.455** (5.488) 14.184***
(1.76) (4.777) (4.776)
Y14/15 − 9.205*** (2.293) − 9.387*** − 9.099*** (2.562) − 9.161*** − 9.046*** (2.337) − 9.261***
(2.504) (2.411) (2.458)
Environmental pillar score -.956** (0.408) 0.494 (0.520) − 0.553 (0.659)
Environmental pillar score2 0.009** (0.004) 0.009* (0.004)
Environmental pillar score × log(oil price) − 0.102 (0.106) − 0.092 (0.072)
innovation score 0.074 (0.072) 0.457* (0.245) 0.528** (0.249)
Innovation score2 − 0.001 (0.001) − 0.001 (0.001)
Innovation score × log(oil price) − 0.114* − 0.112*
(0.060) (0.060)
Constant − 36.738 (67.759) − 36.688 − 68.81 (73.418) − 63.202 − 62.377 (62.620) − 63.683
(72.277) (70.746) (70.990)
n 153 153 153 153 153 153
F 8.29*** 6.93*** 7.94*** 8.09*** 8.27*** 7.29***
R-squared(within) 0.256 0.228 0.233 0.236 0.26 0.237
R-squared(between) 0.254 0.000 0.153 0.031 0.26 0.029
R-squared(overall) 0.132 0.203 0.221 0.22 0.143 0.185
Joint sig F-test between all terms involving 2.79* 0.73 0.47 1.77 3.26** 1.75
green innovation scores

Robust standard errors in parenthesis. *p ≤ 0.10, **p ≤ 0.05, ***p ≤ 0.01.

significant. green innovation. Third, if there is no sufficient environmental policy

Model 6 acts as a robustness check and it adds all the independent
variables used in the previous five models, including both quadratic
terms of the green innovation variables and the interaction term of crude
oil price and green innovation. There is a significant positive effect from
innovation score at the 5% level, no significant quadratic term, while
coefficient of the interaction term with crude oil price is negative sig­
nificant at the 10% level. The estimates for environmental pillar score
show that the coefficient of the quadratic term is positive and significant
at the 10% level.
4.2.2. Discussion of the results
There is a positive effect from innovation score on financial perfor­
mance of oil and gas companies headquartered in the US and Europe.
This means that, efforts and investments for developing new and green
products and processes will assure the long-term survival of a company
by maintaining competitiveness. As we see a shift towards higher
awareness of climate change, there are good opportunities for the oil and
gas companies to utilize their innovations to improve their financial
performance through the mechanisms of differentiation, cost reduction,
and green image.
Furthermore, we find that in the US companies the effect of envi­
ronmental pillar score is positive but with a diminishing rate. This
inverted U-shape is consistent with findings in previous literature on
green innovation’s effects on financial performance (see e.g., Bontis
et al., 2005; Misani and Pogutz, 2015; Ramanathan, 2018). The previous
literature suggests that too much focus on green innovation efforts can
negatively affect other operational activities by using too many re­
sources (Wagner, 2005). For European oil and gas companies the result
is opposite of US, as environmental pillar score has a U-shaped curvi­
linear relationship with financial performance. This finding is in line
with Trumpp and Guenther (2017), which argue companies must make a
minimum level of commitment to green innovation before the positive
effects on financial performance start to show. There can be several
reasons for this phenomenon. First, innovation can result in a negative
effect on financial performance due to the high risk during the innova­
tion process (de Oliveira et al., 2018). If innovation fails, companies
obtain nothing from the investment but increased operating costs and
lower profit. Second, it is time-consuming to recoup investments in
and financial support, the positive effect on financial performance can
be hard to identify (Rennings, 2000).
The results show no significant moderating effect from crude oil
price on the strength of the relationship between environmental pillar
score and financial performance both in US and Europe. Furthermore,
there is no evidence for the moderating effect of crude oil price on
strength of the relationship between innovation scores and financial
performance of US oil and gas companies. However, in European com­
panies, the strength of the positive relationship between innovation
score and financial performance declines with increasing crude oil price.
This effect is not found for environmental pillar score. When crude oil
price is high, the oil and gas companies should focus on their conven­
tional business rather than allocating the resources on green innovation
practices. According to the microeconomic short-term demand and
supply theory, a higher price causes the supply curve to move to the
right and induces more production of oil and gas if it is profitable to do
so. High crude oil price suggests that the supply is in shortage and the
demand from the consumer side is strong. As the resources are limited,
when oil prices are hight there would be higher opportunity cost for
investing in green practices. In this condition, the negative opportunity
cost of green innovation investments rises and dominates the negative
effect of restraining environmental regulations. Therefore, the positive
effect of higher green innovation practices on financial performance is
weaker when the oil prices increase.
5. Conclusion
To reduce environmental emissions from oil and gas industry, be­
sides shifting towards alternative energies, green innovation practice is
an important investment strategy. However, the impact of green inno­
vation on financial performance of companies is a crucial factor for
future green investment decision. To comply with increasingly strict
government environmental regulations, oil and gas companies must
identify innovative solutions to make their products and processes
greener, without compromising their financial objectives. This paper
investigates the effect of green innovation on financial performance in
the US and the European oil and gas companies, using panel data from
2010 to 2018.

8
T.M. Aastvedt et al.
Using environmental pillar score and innovation score to measure
green innovation level of companies, we find that in both US and
Europe, innovation score has a positive effect on financial performance.
However, the effect of environmental pillar score is curvilinear in both
regions. In US, at low level of environmental pillar score, it positively
affects financial performance and at higher levels, the effect can turn to
negative. For European companies the effect is opposite, as at low level
of environmental pillar score, there is a negative effect, which turns to
positive at higher levels of this score. Moreover, only for European
companies, higher crude oil prices negatively moderate the relationship
between innovation score and financial performance. This suggests that
in Europe, the opportunity cost of innovative practices is high when
crude oil price is high.
The reason for the difference in results between the US and the Eu­
ropean companies is that they have different willingness and attitudes
toward pursuing environmental performance. As Bakker and Francioni
(2014) point out, the US has concerns that complying with emission
reduction regulations could hurt the competitiveness of the industries.
To avoid the commitment to international environmental regulation, the
US set up its environmental regulation system at the national level and
emphasizes more on the cost-benefit analysis and the companies’
financial performance. On the contrary, the Europe has established
increasing regulations on environment protection. As the European
companies pay more attention to compliance with the regulations than
to take initiative in green innovation practices, there would be fewer
first-mover advantages (Aguilera-Caracuel and Ortiz-de-Mandojana,
2013). Responsive and regulation-driven innovations have been
proved to be time-consuming and inefficient in previous studies (Noci
and Verganti, 1999; Bigliardi et al., 2012). According to Aguilera-Car­
acuel and Ortiz-de-Mandojana, 2013, the stringency of environmental
regulations has a negative effect on the relationship between green
innovation and companies’ financial performance. Thus, only when
achieving a certain level of economic scale, green innovation practices
promote the companies’ financial performance.
Furthermore, the companies in the US have much higher concen­
tration of R&D spending than their European counterparts, regardless of
operating revenue and volatility in the business cycle. The top US
companies have increased their share of R&D expenditure in the last 10
years, while the share invested by European companies has decreased
(Hernández et al., 2019). This suggests that willingness for investing in
innovation are higher in the US businesses, which have shown to have a
big impact on both the rate and the success of innovation efforts (Jamrog
et al., 2006).
In summary, the US is more profit-driven and Europe is more regu­
lation- and motivation-driven concerning green innovations. In one side,
this made the European oil and gas companies’ financial performance
more vulnerable to crude oil price fluctuations. Therefore, higher crude
oil price discourages the European companies to invest in green inno­
vative projects, while lower crude oil prices are in favor of environ­
mentally friendly decisions. On the other side, despite the US companies
having a better financial performance at lower levels of green innova­
tion activities, European oil and gas companies show a better financial
performance when the level of green innovation is higher. Therefore, in
both group of companies, it is important that corresponding to the sit­
uation, e.g., crude oil price level, and companies environmental activity
level, policy makers offer support packages and economic incentives to
help oil and gas companies to maintain their activities. This result is
important for policy makers to create more effective regulations and
support systems, which enables the environmental performance of oil
and gas companies to improve while maintaining their desired financial
performance.
Author statement
Tonje Marthinsen Aastvedt: Conceptualization, Methodology, Soft­
ware, formal analysis, Writing- Original draft preparation. Niaz Bashiri
9
Resources Policy 73 (2021) 102235
Behmiri: Ideas; formulation of overarching research goals and aims,
Data curation, Writing- Reviewing and Editing, Supervision. Li Lu:
Conceptualization, Methodology, Software, formal analysis, Writing-
Original draft preparation.
Acknowledgement
The authors acknowledge financial support from University of Sta­
vanger Business School. Furthermore, the authors appreciate the com­
ments from the reviewer and the editor of the Resources Policy.
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