Does ESG Performance Hinder Product Innovation?

Abstract

As more firms embrace sustainability goals, a critical question emerges: does ESG hurt product innovation? Drawing on the attention-based view of the firm, we argue that while ESG performance requires significant managerial attention, potentially crowding out focus on product innovation. We test our framework using a panel of 457 publicly listed U.S. firms over 15 years (2007-2021), comprising 19,340 firm-quarter observations. We find that ESG performance is negatively associated with product innovation and that this relationship depends on three contextual factors. R&D intensity enables better capability alignment mitigating the negative association. Firms that face intense competition are better equipped to innovate due to external pressures to differentiate their products. In contrast, high ROA that carries more resource slack implies that firms may become more risk-averse, reinforcing the negative effect. Our findings shed light on the hidden and unintended consequences of ESG performance and offer guidance on how firms can align purpose with innovation ambition.

Keywords: ESG Performance, Sustainability, Product Innovation, R&D Intensity, Competitive Intensity, ROA