Who are the top green game changers? You'd be surprised

These companies are the last you’d expect to be at the cutting edge of climate change mitigation

(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns.)

CHAPEL HILL, N.C. (Callaway Climate Insights) — Would you like to know which companies are at the cutting edge of innovative climate change mitigation technologies?

Of course you would. Armed with that information, you could direct your investments to these companies that are doing the most to mitigate climate change.

Well, guess what? Prominent on the list of companies you should be considering are companies such as ExxonMobil (XOM), Royal Dutch Shell (RDS.A), BP (BP), ConocoPhillips (COP), and Chevron (CVX).

That’s the provocative result of a study that the National Bureau of Economic Research recently began circulating, titled The ESG-Innovation Disconnect: Evidence From Green Patenting.

The study’s authors are Lauren Cohen, a professor at Harvard Business School; Umit Gurun, a professor at the University of Texas at Dallas; and Quoc Nguyen, a professor at DePaul University.

The professors analyzed all patents awarded to U.S. publicly-traded companies since 1980, classifying them as “green” or not according to the International Patent Classification system created by the Organization of Economic Cooperation and Development.

Much to their surprise, the researchers found that many of the top 50 “green patent” producers were oil, gas and energy-producing firms. (They considered a patent to be “green” in the event it related to any of a number of environment-related technologies.)

In 11th place on that top-50 list, for example, is ExxonMobil. Royal Dutch Shell is in 18th place, and BP and ConocoPhillips are in 27th and 28th places. Chevron is 30th.

There is much irony in these findings, of course. ExxonMobil is at the top of most ESG investors’ lists of the most climate-unfriendly companies. Many other firms in the energy industry are not far behind. ESG investors go out of their way to avoid owning any companies in this industry, and many ESG mutual funds specifically exclude them.

Yet, by so doing so, ESG investors may be missing out on investments that could have a big impact on climate change.

Professor Cohen in an interview identified several reasons why energy companies should not be automatically excluded from ESG investors’ portfolios:

  • Relative to comparable companies at the top of ESG rankings, energy companies “have produced over two times as many green patents.”

  • Nearly a quarter of all the patents produced by energy companies over the past 40 years fall in the “green” category. The comparable “green patent ratio” for non-energy companies that also engage in “green” patenting is just 8.3%.

  • Furthermore, energy companies’ green patent ratio has grown faster than for non-energy companies. For the latest year analyzed, Cohen told me, the ratio was 30% for energy companies, double what it was in the 1980s. The ratio for non-energy firms has grown over the same period from just 6.4% to 6.7%.

In fact, not only should ESG investors not automatically exclude energy companies, they may even want to overweight them.

Double- and triple checking these results

Given how counterintuitive their findings were, Cohen said that he and his co-researchers double- and triple-checked to make sure that energy companies’ green patent production is truly as impressive as their numbers suggest.

One possibility they explored is whether these companies were producing a large number of mostly inconsequential patents. This would be the case, for example, if the energy companies were engaged primarily in a greenwashing exercise to convince the public they were more committed than they really were to tackling climate change.

To investigate this possibility, the professors tracked the number of citations that each green patent receives in the literature. They reasoned that inconsequential patents would receive fewer citations. But that is not what they found: Energy company green patents received significantly more citations, on average, than the green patents produced by non-energy companies.

Another possibility the professors explored is whether the green patents the energy companies produced had nothing to do with reducing fossil-fuel use. “This might be especially true if energy firms were attempting to strategically appear engaged in green patenting, but not wanting to materially impact the fossil-fuel components of their businesses,” the professors speculated.

But this also turned out not to be the case. They re-ran their analysis focusing just on patents in the “climate change mitigation” category, and reached almost identical results.

On average, Cohen told me, “energy companies focus their patenting efforts three times as much toward the climate change mitigation category as otherwise comparable non-energy companies.”

Purity vs. impact

This new research dovetails nicely with a theme I’ve highlighted in several recent columns. A month ago, you may recall, I wrote that, rather than “rail at Big Oil for polluting, financial lenders should consider incentivizing them with creative green financing opportunities.”

In late September, furthermore, I argued in another column that “if your goal is using your investment dollars to help create a better climate, then you should consider investing in companies that are big polluters.”

One creative green financing opportunity is the green bond, as I outlined in those previous columns. But no doubt there are others that haven’t yet been created. Cohen urged all of us to explore news ways of instituting “reward-based incentives” that “give rewards for outcomes we want.” He thinks this approach is more likely to change corporate behavior than the path taken by many ESG investors of penalizing companies.

This exclusionary approach makes the mistake of regarding companies in a binary fashion as either all good or all bad. As this new study convincingly shows, that is not the case even with companies previously thought to be at or very near the “all bad” end of the spectrum.