Does environmental innovation affect upside and downside risk differently? Global evidence

PurposeThis study aims to investigate whether firms’ environmental innovation affects equity risk symmetrically, with particular attention to whether the association differs between upside and downside risk components.Design/methodology/approachUsing 40,444 firm-year observations from 2003 to 2023, the author analyses the link between environmental innovation and market risk measures using a panel regression with industry and firm fixed effects. Market risk is measured using total risk, as well as specific upside and downside risk metrics. These include Parametric VaR, Historical VaR, Conditional VaR, upside potential and conditional upside potential. The author also addresses endogeneity using an instrumental-variable approach, firm-fixed effects to control for time-invariant firm-specific omitted-variable bias, and propensity-matching regression to address the identification issue.FindingsEnvironmental innovation is negatively linked to firms’ risk, including total risk, upside risk (Parametric VaR, Historical VaR, Conditional VaR) and downside risk (upside potential, conditional upside potential). Results show a significant effect: a rise in environmental innovation from the 25th to 75th percentile reduces risk by 1.39 to 3.47% across measures. The negative link is stronger in developed markets and remains consistent after controlling for lagged factors, country effects and crises.Originality/valueThis study contributes to the climate finance literature by providing comprehensive global evidence on how environmental innovation relates to both the upside and downside risk. By documenting significant risk reductions and market differences, the findings enhance understanding of how environmental innovation affects risk for investors and policymakers.