Firms with green innovation patents rewarded in the credit market, finds study

A Queensland University of Technology (QUT) study of the US credit default swap (CDS) market’s response to green innovation in the form of green patents found that firms with more green patents had lower borrowing costs and higher credit ratings.

The findings are published in the journal Energy Economics.

The study analyzed the effects of green patents on CDSs on 4,532 US-based firms from all sectors between 2002 and 2020, including the effects of the United States Patent and Trademark Office’s (USPTO) green technology pilot program to accelerate the green patent application approvals (December 2009—March 2012).

Dr. Sohanur Rahman, from QUT’s School of Accountancy, who conducted the study, said the in-depth analysis indicated that credit investors took green patents into account when determining the price of CDSs.

“The CDS market is where protection buyers pay premiums (CDS spreads) to insure against credit risk on assets such as bonds or loans—the premiums are higher for risky assets and vice versa,” Dr. Rahman said.”Green innovation in areas such as energy conservation, pollution prevention, recycling or corporate environmental management are all key environmental protections to address climate change.

“External stakeholders interpret green innovation as a signal that the firm is sincere in navigating environmental uncertainty. The analysis shows that the credit market not only considers the existence of green innovation but also prices the economic value measured by the stock market reactions to green patent grants. This suggests that a greater level of green innovation is followed by a better credit rating.”

Dr. Rahman said the study took advantage of the USPTO green technology pilot program as a quasi-natural experiment.

“I studied firms who had acquired green patents during the USPTO green patent acceleration pilot program and those who hadn’t gained any before and after the program,” he said.

“The findings showed the pilot program green patent approvals accelerated, thus confirming green innovation’s negative and significant effect on CDS premiums. In economic terms, firms with green innovation had 9, 12, and 17 percent lower CDS premiums with five-, three-, and one-year maturity, respectively, than those without green innovation during the pilot program.”

Dr. Rahman said firm-provided and involuntary disclosures had significantly different effects on the association between green innovation and CDS spreads due to opposite investor reactions to these disclosures.

“While firm-provided environmental disclosures had a favorable effect, involuntary environmental disclosures by external channels such as media had negatively affected the association between green innovation and CDS spread.”