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Climate policy and international capital reallocation

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  • Fourné, Marius
  • Li, Xiang

Abstract

This study employs bilateral data on external assets to examine the impact of climate policies on the reallocation of international capital. We find that the stringency of climate policy in the destination country is significantly and positively associated with an increase in the allocation of portfolio equity and banking investment to that country. However, it does not show significant effects on the allocation of foreign direct investment and portfolio debt. Our findings are not driven by valuation effects, and we present evidence that suggests diversification, suasion, and uncertainty mitigation as possible underlying mechanisms.

Suggested Citation

  • Fourné, Marius & Li, Xiang, 2026. "Climate policy and international capital reallocation," Journal of Financial Stability, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:finsta:v:82:y:2026:i:c:s157230892500124x
    DOI: 10.1016/j.jfs.2025.101495
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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment

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