Award-Winning Study Shows Green-Patent Results Don’t Square for Energy Industry


The electricity, gas, water and other utility crises set off by frigid weather across the United State in February renewed interest in energy innovation. In an award-winning paper, UT Dallas researcher Umit Gurun has found traditional energy producers have plenty of new ideas to offer but are meeting resistance from socially responsible investors.

In a working paper, “The ESG-Innovation Disconnect: Evidence from Green Patenting,” Dr. Gurun, an Ashbel Smith Professor of Accounting and Finance in the Naveen Jindal School of Management, and his co-authors uncovered a paradox. In the United States, they found, traditional oil, gas and other energy-producing companies are leading creators of environmentally sound innovations. But because these companies have in the past received low environmental, social and governance (ESG) scores from funds and investors interested in social change as well as financial returns, they often are often barred from ESG — socially responsible — portfolios.

Gurun and co-authors Dr. Lauren Cohen of Harvard Business School and Dr. Quoc Nguyen of DePaul University say their findings raise important questions about these exclusions. They also question “whether reward-based incentives would lead to more efficient innovative outcomes.”

Umit Gurun

The trio won a first-place prize for their work in the Weinberg/IRRCi Research Paper Competition. Their paper was discussed and the prize presented March 16 at the University of Delaware Weinberg Center/ECGI Corporate Governance Symposium.

“We started looking at who produces green patents for several reasons,” Gurun said. “We wanted to see which companies are paving the way to a better, cleaner environment through innovative activities. When we saw that most of the top green-patent producers are energy companies, we were at first puzzled.

“We then started to think about the incentive structures that made these traditional energy companies respond in this particular way in an era where more and more people are advocating more environmentally sound and socially responsible energy use.”

He and his colleagues were also interested, Gurun said, to see if and how ESG considerations — which the U.S. Department of Labor in 2015 released as guidelines to bear in mind in investment decisions — factored into energy innovation.

Data Derived From Green Patents

Gurun, Cohen and Nguyen based their study on an investigation of green patents, those that help protect and preserve the environment through technological innovation concerning waste, wind power, geothermal energy, solar energy and tidal energy, according to a definition popularized by the international Organisation for Economic Co-Operation and Development.

As of 2019, Gurun’s study notes, “sustainable investing represents more than 20 percent of the $46 trillion in U.S. assets under management. Compared to 2015, sustainable and impact investing has increased by more than 40%.”

Even so, Gurun, Cohen and Nguyen discovered, “a sizable percentage of recent green patenting is driven not by highly rated ESG firms, firms that are commonly favored by ESG funds, but instead by firms that are explicitly excluded from the ESG funds investment universe.”

In fact, the researchers found “consistent and robust markers that the quantity and quality of green patenting is higher for energy firms” and that “these firms are precisely those to which capital is often restricted by mandates and campaigns whose directive is to solve the important problems linked to green innovation.”

Using two databases, one a patent-citation and patent-assignment record, and the other a record of environmental scores taken from Sustainalytics ESG Ratings; the researchers studied patterns in green patenting and focused on publicly traded companies because these offered “rich, publicly available measures of firm characteristics, external activities, income, profitability and patent holdings.”

High Scores for Traditional Energy Companies

Results showed that of the top 50 green-patent producers in 2017, 14% — or seven of them — were energy companies excluded by many ESG-favored funds. The firms were BP, Chevron, Conoco Phillips, Exxon Mobil, Honeywell International, Royal Dutch Shell and U.S. Oil, and collectively, they held 6,969 green patents.

Tabulation showed that on average, 56 industries per year were producing green patents during the study period of 2008 to 2017. The researchers learned the energy sector had nearly three times the focus on green innovation as other industries and that nearly 25% of the energy industry’s innovation lay in green research.

Checking to see if energy companies were merely trying to appear engaged in green patenting without impacting the fossil-fuel components of their businesses, Gurun and his co-authors found that the energy industry had a significantly larger percentage of its innovation efforts going specifically toward alternative-energy innovation relative to all other industries — almost three times as much.

Factoring in ESG Scores

The researchers next checked:

• If companies with better environmental scores contributed more green patents.

• If a green patent was more likely to come from a better- or worse-scored ESG company, and

• If a green patent was more likely to come from a company in the energy sector.

Their findings showed two strong patterns: 1) that a green patent was more likely to come from a poorly scored ESG company, and 2) that energy firms had both significantly lower environmental scores but also were large and important producers of green patents.

Despite this production, Gurun and his co-authors found, energy companies got less credit in their ESG scores for their green patents. Outside the energy sector, other top green-patent firms both had significantly higher ESG scores on average, and were rewarded more for green-patenting activity.

Gurun said he and his colleagues have recently uncovered new patterns in citation data that suggest “energy firms’ patents are wide-reaching green innovations, that everyone is benefiting from them.”

They also have found that fossil fuel companies’ green-energy patents produce more kilowatts of alternative energy than those of green-energy firms.

“All these results suggest,” Gurun said, “that companies that are often barred from ESG portfolios are paving the way in the green- patenting world. Instead of exclusionary policies or divestiture campaigns motivated by preference, we recommend a system based on incentives, a system that uses sustainable investment capital to reward companies that make progress toward specific ESG goals, such as green innovation.”

— Kris Imherr

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