Climate Change Policies and FDI Flows

The rapid increase in climate change risks has given rise to multinational and country-level efforts to mitigate its effects. In recent decades, and particularly after the Paris Agreement in 2016, climate change policies (CCPs) have intensified across both advanced countries and emerging market economies. These developments have heightened transition risks stemming from the adaptation of green policies, with potential implications for international capital flows, most notably, foreign direct investment (FDI). This paper investigates the impact of country-specific CCPs on FDI flows using a panel of 40 advanced and EM economies over the period of 1990-2019, employing the local projections (LP) method. The results indicate that CCPs are significantly associated with a decline in both gross and net FDI inflows in EM economies, whereas the effects of CCPs on FDI flows in advanced economies are more muted and statistically insignificant. Further empirical analysis reveals no statistically robust relationship between CCPs and overall portfolio (equity and debt) flows. Our findings contribute to the growing literature on the macro-financial consequences of CCPs and offer valuable insights for both policymakers and international investors.