Environmental information transparency and green innovations1

Extending the theory of exclusionary ethical investing, we model that environmental information transparency (EIT) reduces green investors' screening costs of identifying acceptable and unacceptable firms, resulting in more holdings of acceptable firms by green investors. This incentivizes polluting firms toward green transformation because of the lower cost of capital caused by green investors' shareholdings. Empirically, we use a Pollution Information Transparency Index (PITI) as a proxy for the EIT, finding that PITI is positively related to firms' green innovations. Given the critical social importance of motivating green innovation, our results are of great interest for policy makers and regulators.