This study examines the relationship between environmental innovation and corporate cash holdings using a panel of firms from 24 European Union countries over 2010–2021. While prior literature provides mixed evidence on how sustainability-related activities relate to corporate liquidity, the relationship remains unclear when environmental innovation is distinguished from broader ESG practices. Drawing on trade-off theory, pecking order theory, and the resource-based view, we argue that the uncertainty, long investment horizons, and financing frictions associated with environmental innovation are theoretically consistent with greater demand for precautionary and strategic liquidity. Using pooled panel regressions, a within–between decomposition, robust one-step system GMM, and instrumental-variable estimation, the results show a positive association between environmental innovation and corporate cash holdings. The within–between analysis indicates that this association is driven mainly by differences between firms rather than by statistically significant changes within firms; the evidence is therefore interpreted as associative rather than causal. The positive relationship persists across governance and board controls, the 2017–2021 period, dynamic estimation, industry sensitivity, and selected observed country-level institutional and environmental indicators. Overall, the findings are consistent with the view that environmentally innovative firms maintain liquidity to manage uncertainty and support long-term investment needs.

Title

Discover Sustainability

Publisher

Springer

Publisher Country

United Kingdom

Indexing

Thomson Reuters

Impact Factor

5.2

Publication Type

Both (Printed and Online)

Volume

--

Year

2026

Pages

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