The Bank for International Settlements published a working paper assessing how environmental factors influence portfolio, cross-border bank and foreign direct investment (FDI) inflows to emerging market economies (EMEs). Using a receiving-country panel for 21 EMEs and bilateral data from 19 advanced economies (AEs) to 21 EMEs, it finds that lower exposure to extreme weather events, a higher renewables share in the electricity mix and stronger climate-related policies are associated with higher foreign capital inflows, particularly FDI and portfolio investment. In the receiving-country analysis (1996–2023), increases in extreme weather events and related damage are associated with lower capital inflows, with the clearest and most persistent effects for FDI. After the Paris Agreement came into effect in 2016, higher climate-policy activity in recipient countries is associated with higher portfolio and FDI inflows, with a one standard deviation rise in the number of climate-related policies linked to a 1.3 percentage point of GDP increase in inflows; greater policy stringency is associated with higher FDI but not with bank inflows. The paper also reports that the energy-mix channel becomes positive only after 2016, with a 1 percentage point increase in the renewables share associated with a cumulative rise of up to 0.4 percentage points of GDP in portfolio and FDI inflows, while higher fossil-fuel shares show the opposite association. In the bilateral analysis (2010–2023 for FDI; 2010–2023/2016–2024 in reported bank-flow regressions), stricter environmental regulation in AEs is associated with higher FDI and bilateral bank inflows to EMEs, especially those with weaker environmental regulation, consistent with an “emission shifting” mechanism. A one standard deviation increase in climate-related policies in the sending country is linked to a 6% increase in the growth rate of bilateral FDI after two years (9% for lower-regulation EMEs versus 4% for higher-regulation EMEs) and around a 2% increase in bilateral bank inflows, and stricter AE regulation is also associated with stronger flows towards EMEs with a greener electricity mix.
Bank for International Settlements 2025-11-01
Bank for International Settlements finds greener energy mixes and stricter climate policies are associated with higher capital inflows to emerging markets
The Bank for International Settlements released a paper analyzing how environmental factors affect capital inflows to emerging market economies (EMEs). The study finds that lower exposure to extreme weather, a higher renewables share, and stronger climate policies correlate with increased foreign direct investment (FDI) and portfolio inflows. Additionally, stricter environmental regulations in advanced economies are linked to higher FDI and bank inflows to EMEs with weaker regulations.