Societal pressures for greater sustainability can encourage firms to target part of their innovation activities at ecological initiatives (i.e., eco‐innovation). Yet, depending on their value function, firms can respond differently to such pressures and exhibit variance in their eco‐innovation activities. In this paper, we investigate the idea that a firm’s ownership structure may play a significant role in determining its engagement in eco‐innovation. Specifically, we propose that ownership by family blockholders increases the value attached to the company’s reputation and that this, in turn, stimulates higher levels of eco‐innovation. In other words, we model the company reputation motive as a key mediator in the relationship between family ownership and firm‐level eco‐innovation. To account for family firm heterogeneity, we also model the moderating role of owners’ intention to pass the business on to the next family generation (transgenerational intentions) and of the extent to which these owners reside in the firm’s local community (local embeddedness). As theoretical backdrop, our study builds on institutional theory and the mixed gamble logic. To test our hypotheses, we use a large sample of German firms and nonlinear moderated mediation regression analysis. Results reveal that family ownership is positively related to the introduction of eco‐innovations by firms, in part because of the stronger emphasis being placed on the company’s reputation. We find that this effect is strongest when the owning‐family has transgenerational intentions. As such, this study advances our understanding of firm‐level drivers of eco‐innovation. In view of the prevalence of family‐owned firms and the mounting importance of ecological sustainability, it is valuable to extend knowledge on the contingent and indirect effect of family ownership on eco‐innovation.