By Kristen Senz

Should eco-conscious investors support a company that’s developing innovative solutions to climate change—even if that company is also a major polluter?

The market’s answer to this question has been a resounding “no,” as evidenced by the investment policies that exclude traditional oil producers from most so-called sustainable funds. But this stance eliminates some of the most prolific and influential producers of green innovation, including Exxon Mobil, BP, and Chevron, according to recent research by Harvard Business School Professor Lauren Cohen.

Faced with mounting concerns about climate change, oil companies are diversifying their businesses, putting money toward renewable energy sources and green technology. While sustainable funds shun fossil fuel producers, which contribute half of the world’s greenhouse gases, Cohen’s study suggests that these companies could also play a key role in stemming the damage.


“They are investing about three times more than the average firm in climate change mitigation technology,” says Cohen, the L.E. Simmons Professor of Business Administration at Harvard Business School. “This is technology that’s going to help us to abate these issues around energy and climate, and it’s the best technology in that space.”

The spectacular rise of sustainable investing

Almost 33 percent of the $51.4 trillion in US assets under management are allocated to sustainable funds that invest in companies with specific environmental, social, and governance (ESG) factors and goals. Since 2015, when the US Department of Labor began allowing pension fund managers to incorporate ESG scores into their investment decisions, the volume of assets under management in sustainable investment funds has grown more than 40 percent.

At the same time, the number of patents issued for green technologies has increased significantly. According to Cohen and his colleagues, 5,251 green patents were issued in 2017, amounting to about 6 percent of all patents filed by publicly traded companies. But the relationship between the spectacular rise of sustainable investing and the growing number of “green patents,” as defined by the Organization for Economic Cooperation and Development (OECD), has not previously been studied in a systematic way.

Cohen and his co-researchers wanted to find out whether sustainable investment capital is flowing to companies that are in the best position to solve the urgent and complex problems created by climate change. In their new working paper, The ESG-Innovation Disconnect: Evidence from Green Patenting, the research team argues that “the majority of this recent green patenting is not driven by highly rated ESG firms … but instead by firms that are explicitly excluded from the ESG funds investment universe.”

‘Blockbuster’ innovation

Cohen and coauthors Umit Gurun of the University of Texas at Dallas and Quoc Nguyen of DePaul University analyzed patents issued between 2008 and 2017. To Cohen’s surprise, among the top 50 green patent producers were Exxon Mobil (ranked 11), Royal Dutch Shell (18), BP (27), ConocoPhillips (28) and Chevron (30).

The energy sector as a whole was the second-highest producer of green patents, second only to the manufacturing industry. The analysis also showed that energy producers started making substantial investments in renewable energy long before sustainable investing and ESG scores existed. Even more telling, Cohen says, is the fact that these oil producers also hold the most “blockbuster” green patents, meaning they have developed foundational technologies that other companies frequently cite and build on in subsequent innovations.

Cohen says many large energy companies have tried to rebuild their images, distancing their brands from oil production. BP, for example, infamously changed its name from British Petroleum to Beyond Petroleum in 2001 and recently announced plans to become an “integrated energy company” that also offers fuel from low-carbon sources.


“They don’t want to be your oil provider for the next hundred years,” Cohen says. “They want to be your energy provider for the next hundred years. So, if that energy shifts to a different source, they also want to be your hydroelectric provider, or your solar provider, or your wind provider.”

It stands to reason, adds Cohen, that due to their deep expertise and history in the energy sector, these companies might be uniquely positioned to develop the renewable energy solutions we need to slow and potentially begin to reverse climate change trends.

Sincere investment or standing in the way?

The results of the study have already drawn the attention of pension funds and other asset managers. Some observers have questioned whether oil producers are really using the technologies they’re patenting, or if the patents are part of a strategy to protect the oil business. Cohen and his colleagues were concerned about this exact point.

“Is this an area where energy firms are putting their investment dollars where their patents are?” questions Cohen, “or are they simply patenting to block other firms, leaving their green patents strategically unused on the shelf?”

When they dug deeper, Cohen and his colleagues found evidence that energy sector firms are making substantial investments in alternative energy projects. In particular, energy firms are significant global producers of electricity, harnessing their blockbuster patents. They also are central investors in some of the largest renewable projects worldwide, such as Shell’s involvement in NoordZeeWind, the first wind farm with capacity to generate over 100 megawatts, built in the Dutch North Sea.

The researchers found no evidence that energy companies are creating “patent thickets” that restrict others from innovating in specific product areas. Patents secured by traditional energy firms are frequently cited by newcomers to green innovation from outside the traditional energy industry.

Given the market forces favoring green technology, Cohen doubts that companies are shelving valuable, blockbuster inventions. He and his colleagues hope that by finding out whether these traditional energy firms have applied their patented technology in their products, they can further validate their initial results over the coming months.


In light of the study results, Cohen says that opening sustainable investment to traditional energy firms might deliver clean energy faster. He points out that although oil companies typically have lower ESG scores, these scores are a “murky” measure for sustainability and vary widely across different risk-assessing entities.

“Everyone cares about [investing in renewable energy and other ESG goals], and yet we don’t know how to measure it,” he says. “There are no experts in this. We’re just giving our money to people who claim that ‘Yes, we’re doing this.’ But then you can get really inefficient allocation of capital, and that means we solve the problem slower.”

Rather than exclusionary policies and divestiture campaigns motivated by preference, Cohen and his colleagues recommend an incentive-based system that uses sustainable investment capital to reward companies that make progress toward specific ESG goals.

“My hope is that we take an open mind and a scientific approach to understanding what the best way to get to the solution is,” says Cohen. “And I think part of that approach is at least considering that it could be true that these energy firms might be helpful in some way.”

About the Author

Kristen Senz is the growth editor of Harvard Business School Working Knowledge.

The article has been sourced from Harvard Business School Working Knowledge and can be accessed by clicking here