When Governments Talk Climate, Investors Listen: Policies Can Drive Green Investments

By Zhenyu Gao, Yan Luo, Shu Tian, Hao Yang

Governmental policies can influence individual investor behavior, driving them towards sustainable investments and shaping' risk perceptions and investment choices.

Public awareness of climate change has increased significantly during the past decade. A survey of more than 40,000 respondents in 20 countries that account for 72% of global carbon dioxide emissions found that at least 75% of respondents in each country agree that “climate change is an important problem” and that their country “should take measures to fight it.” 

 As governments worldwide introduce various policies to mitigate climate change, institutional investors are incorporating climate-related risks into their investment decisions. However, evidence of whether individual investors consider climate-related risks in their investment decisions remains thin. 

Investors are Increasingly Aware of Climate Change and its Risks
Note: Figures recreated based on survey results in Dechezleprêtre et. al (2022) Fighting Climate Change: International Attitudes Toward Climate Policies

 

Despite this,  studies do suggest that governments’ environmental commitments raise investors’ climate risk awareness. For instance, one study found that the introduction of measures to achieve the “dual carbon” goals triggered interest among investors about carbon risk and led to an increase in the value of investments that delivers better environmental performances.

The study focused on the People’s Republic of China market, where drastic carbon emission reduction has been committed through its carbon peaking and carbon neutrality goals, known as the “dual carbon” goals.

In September 2020, at the 75th United Nations General Assembly, the People’s Republic of China proposed dual carbon targets, setting the goal of reaching a carbon dioxide emissions peak by 2030 and carbon neutrality by 2060. In March 2021, the People’s Republic of China proposed a specific governance framework to achieve carbon peak and carbon neutrality at the ninth meeting of the Central Financial and Economic Commission.

The proposition of the dual carbon goals has attracted much attention from the public about climate risk. After the announcement of dual carbon goals in September 2020 and the announcement of a range of specific measures to achieve dual carbon goals in March 2021, the search volume on Baidu, the most widely used search engine in the People’s Republic of China, for terms “carbon neutrality” increased substantially. Accordingly, our evidence shows that with increased awareness and attention to the climate risk after the introduction of specific measures to achieve the dual carbon goals, there is a significant increase in individual investors’ net purchase of mutual funds that delivers higher environmental performances.     

This indicates that governments’ climate commitments and policies can drive private investment, not only via incentives and regulation but also by shaping investors’ risk appetite and investment behavior.  Climate policies that guide investment behaviors can help cost-effectively steer capital toward sustainable investments.

This blog post is based on data from the recently published Asia Bond Monitor Theme Chapter Climate Risk Awareness and Fund Trading of Individual Investors.