Market Valuation of Climate Patents: What Are the Most Valuable Innovations?

Do climate-related patents create financial value?

Marie Brière, Murad Nuriyev, and Sébastien Pouget analyse the relationship between firm valuation and climate-related patents in "Market Valuation of Climate Patents: What are the Most Valuable Innovations?".

Using USPTO patent data and firm-level R&D investments covering the 1995-2020 period, they examine how investors value different types of climate innovation. Their main conclusions include:

• Climate patents, on average, do not lead to a higher market valuation.
• Patents which improve the efficiency of fossil-fuel technologies (or "Carbon-intensive" patents) are positively correlated with firm valuation, increasing Tobin's Q by 0.9% to 1.5% per standard deviation increase in patent stock.
• Investors see additional value in innovations addressing both dimensions of climate risks simultaneously, as firms with adaptation and mitigation dual-purpose patents experience a 0.5% to 0.7% increase in Tobin's Q.
• Other climate patents do not show a significant impact on firm value, reinforcing the notion that climate innovation remains a long-horizon investment.
• Carbon-intensive climate patents receive citations earlier, implying that investors may favour technologies with immediate applications over longer-term disruptive green solutions.

Listed issuers facing challenges in aligning innovation cycles with market expectations can keep in mind the clear investor preference for low-risk, transitional green innovations.

Investors tend to undervalue long-horizon green technologies, which could result in capital misallocation away from breakthrough sustainability solutions.

The study is however limited regarding the positive impact of climate innovations: as climate patents do not always translate into commercial success, valuations may not fully capture the societal benefits of climate technologies.