Environmental management control systems and environmental innovation: Unintended consequences of the EU non-financial reporting directive

We examine the effect of regulatory-driven environmental management control systems (EMCS) on environmental innovation by exploiting the non-financial reporting Directive 2014/95/EU as a quasi-natural experiment. One explicit aim of this directive is to improve the measuring, monitoring, and managing of undertakings' performance and their impact on society. A regulated context may compel managers to prioritize external regulatory requirements over their specific organizational contingencies. This shift could lead to a decrease in flexibility, which is needed to effectively accelerate environmental innovation, arguably one of the corporate flagships for enhancing environmental performance. We perform a difference-in-differences design using the EU directive as a plausible exogenous shock to EMCS and environmental innovation. Our results suggest that: (i) the directive under study increases the adoption of EMCS, (ii) non-regulated EMCS foster environmental innovation and, even more importantly, (iii) regulatory-driven EMCS have a short-term (temporary) lessening effect on environmental innovation. In further analysis we find that this lessening effect reverses from t+1 onwards, once internal frictions are overcome, with the effect being positive in the long run.