International Evidence on How Investors Value Environmental Innovation: Non‐Pecuniary Investor Preferences or Risk Mitigation?

We study how environmental innovation shapes investor expectations. We propose two mechanisms through which sustained improvements in environmental innovation may influence these expectations: non‐pecuniary investor preferences and risk mitigation. Using an international sample, we find that long‐term improvements in environmental innovation materially influence investor expectations, as reflected in a lower ex‐ante cost of equity and higher market valuation. Our evidence further highlights the moderating role of intra‐industry R&D dispersion, which captures firms' risk of falling behind their industry peers technologically. We show that investors do not reward environmental innovation unconditionally; they value sustained improvements in environmental innovation more when firms operate in industries with higher R&D dispersion because they perceive that such improvements will likely lower risks of technological lag and transition‐related vulnerability. Overall, our findings suggest that sustained improvements in environmental innovation shape investor expectations primarily through the risk mitigation mechanism rather than through the non‐pecuniary investor preference channel.