The determinants of green investments by institutional investors: The role of government carbon mitigation strategies and policies

The increasingly evident shortfall in green financing, particularly from institutional investors, needs to be addressed to advance sustainable development. Currently, the scholarship tends to focus on the effects of regulatory frameworks, market forces and the macroenvironment. However, there is a paucity of research which considers the impact of the interaction of these factors. To address this gap, this study examines whether government capital expenditure influences institutional investors’ green investment allocations and whether government carbon mitigation policies moderate this relationship. Using data from the world bank portal, global sovereign wealth funds and the carbon pricing database for the sample period of 2010 to 2022 across 40 countries, this study uses OLS, GLS and Quantile regressions to address the research questions and System Dynamic GMM regression is used for robustness checks. Additionally, the Heckman test is used to test whether sample selection bias exists. The findings from Quantile regression indicate that an increase in government funding influences institutional investors’ green investments, within the middle and upper quantiles. While the results obtained from the GLS estimation for the full sample suggest that government investments may be insufficient on their own; when combined with carbon policies and carbon laws, institutional investors are persuaded or discouraged to undertake green investments. This study has policy implications as it demonstrates how institutional investors respond to government actions. When green investments are supported by long-term policy frameworks and fiscal spending, they become more appealing and align with fiduciary obligations. This study also covers SDGs 9, 12 and 13.