The role of firm’s financial and managerial capacity in paving the way for the green
transition
Despite the ambitious carbon reduction targets set by policy makers worldwide, current
investments fall well short of the net-zero emissions scenario. This paper analyses
the factors holding back corporate green investment, with a particular focus on the
role of firm capacity – specifically financing constraints and weak green management
practices – and its interaction with environmental policy. Combining a variety of
econometric techniques, including panel data models, difference-in-differences settings
and instrumental variable approaches, our cross-country analysis on large listed companies
shows that: i) both financing constraints and a lack of green managerial capacity
reduce firms’ probability of investing in green technologies, leading to higher emission
intensity; ii) well-designed environmental policies can mitigate these impacts. A
case study using more granular data on Portuguese firms further shows that: iii) green
investment is more elastic to financing conditions than other types of investment;
iv) investment in integrated technologies is more sensitive to financing conditions
and to managerial capacity compared to end-of-pipe solutions. Lastly, the paper discusses
a wide range of policy options that may be considered to foster the green transition
through upgrading firms’ capacity.
Published on February 08, 2024
In series:OECD Economics Department Working Papersview more titles