In this study, we investigate both why and in what contexts board political diversity is associated with environmental innovation. Drawing from upper echelons theory, political psychology, and stakeholder engagement theory, we explore the mediating role of stakeholder orientation, and moderating roles of diversity and inclusion culture, ESG controversies, and liberal state locations to explain the relationship between board political diversity and environmental innovation. We propose that a more politically diverse board is associated with increased environmental innovation because boards with political diversity prioritize stakeholder engagement and environmental issues. We test the hypotheses using a large panel data set with the S&P 1500 firms over the period of 2002-2018 and find evidence supporting the hypotheses. The results suggest that stakeholder orientation is a key mechanism through which a politically diverse board is positively associated with environmental innovation. There is also a synergistic interaction effect between a politically diverse board, diversity and inclusion culture, ESG controversies, and state political liberalism which facilitates environmental innovation.
