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How green investment funds drive green innovation? The role of governance

Author

Listed:
  • Chu, Yinxiao
  • Huang, Xiaoyu
  • Wang, Bingbing

Abstract

As sustainable finance gains global momentum, understanding how it translates into real corporate environmental action is essential. This paper examines whether and how green investment funds influence firms’ green innovation in China. Using panel data from 2006 to 2020, we find that green fund ownership significantly increases both the number and share of green patent applications. These effects are stronger in firms with weaker governance structures, limited managerial incentives, or lower attention to environmental issues. The underlying mechanism is that green funds act as external monitors who help overcome key barriers to green innovation. By putting pressure on managers to exert greater effort, supporting high-risk projects to reduce managerial hesitation, and aligning managerial priorities with long-term environmental goals, they mitigate the agency frictions and incentive distortions that typically discourage firms from undertaking uncertain and delayed-return innovation projects. These findings highlight an ownership-based channel through which sustainable finance reshapes firm behavior, offering insights for both capital market participants and environmental policymakers.

Suggested Citation

  • Chu, Yinxiao & Huang, Xiaoyu & Wang, Bingbing, 2025. "How green investment funds drive green innovation? The role of governance," Economic Analysis and Policy, Elsevier, vol. 88(C), pages 1284-1305.
    • Handle: RePEc:eee:ecanpo:v:88:y:2025:i:c:p:1284-1305
    DOI: 10.1016/j.eap.2025.10.036
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    Keywords

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    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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