Fuel to Green: Do U.S. Oil and Gas Firms Use Green Innovation and CSR Disclosure to Mitigate Financial Risk

ABSTRACT

This study aims to explore how oil and gas firms adopt two sustainability tools, namely green innovation and corporate social responsibility (CSR) disclosure, either separately or in combination, to mitigate financial risk. The empirical study examines a sample of 229 oil and gas firms over the 2010 to 2019 period. The results show that adopting green innovation or enhancing the CSR disclosure strategy through increasing the overall CSR score or the environmental score increases financial risk. However, enhancing social disclosure decreases financial risk. The combined effect of implementing both green innovation and CSR disclosure in oil and gas firms results in a more substantial increase in financial risk. Additional tests show that breaking down the CSR disclosure score into its individual components shows that environmental disclosure is positively linked to financial risk, while social disclosure exhibits a negative association. Moreover, integrating social or governance disclosure with green innovation serves to mitigate financial risk, whereas combining environmental disclosure with green innovation exacerbates financial risk. Notably, the combined impact of sustainability tools on financial risk is particularly pronounced in pure oil firms. For worse players (firms with high carbon intensity), the adoption of one or both sustainability tools increases financial risk more than for better players (firms with low carbon intensity), reflecting their greater exposure to regulatory and market pressures. Lastly, the results show that the overall conclusions remain consistent during pre‐oil crisis and post‐oil crisis periods; however, they do not hold significance during the oil crisis.