Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/336542 
Year of Publication: 
2025
Series/Report no.: 
ADB Economics Working Paper Series No. 830
Publisher: 
Asian Development Bank (ADB), Manila
Abstract: 
Using newly compiled cross-economy data on national climate legislation matched with mutual fund portfolio holdings, this paper finds that enshrining a climate commitment in law redirects capital toward green assets. A staggered difference-in-differences design reveals that legally binding climate commitments lead to a substantial increase in the share of environmental, social, and governance (ESG) holdings in total mutual fund assets. The effect is driven by laws setting net-zero emission reduction targets, which increase the ESG share by about 5 percentage points over 5 years. A simple back-of-the-envelope calculation suggests this corresponds to a rise in ESG mutual funds' holdings of about 1.8% of gross domestic product. The effect, which is strongest in bond and actively managed funds, is explained by tighter mitigation policies as well as reduced policy uncertainty and reflects an expansion in both the supply of and demand for green assets, rather than asset price changes. These findings underscore the role of legally binding commitments in anchoring expectations and mobilizing climate finance.
Subjects: 
climate laws
net-zero targets
sustainable finance
ESG investment
mutual funds
policy uncertainty
climate policy stringency
JEL: 
G11
G15
G18
Q54
Q58
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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