Net‐Zero Transitions Through Finance: Heterogeneous Effects of Sustainable Finance Policies Across Economies and Policy Designs

ABSTRACT This paper examines the global effects of sustainable finance policies on firms' greenhouse gas (GHG) emission reductions. Drawing on a framework that distinguishes between the motives for implementing different sustainable finance policies and the relevant instruments used to achieve them, we analyze data from over 10,000 public firms in 64 economies over 2002–2021 using a quasi–difference‐in–difference‐in‐differences strategy. We find that countries with greater numbers of sustainable finance policies are associated with firm‐level Scope 1 GHG emission reductions in carbon‐intensive sectors. These effects are stronger/more pronounced in countries employing promotional (rather than prudential), as well as incentive‐based (rather than informational) types of sustainable finance policies. Additional scenario analysis further confirms our critical insights: Simply maintaining the 2010–2020 rate of new policy creation is insufficient. To meet midterm climate goals, the policy focus must shift toward a set of promotional and incentive‐based policies designed specifically to regulate investors. Our results speak to both the cumulative and differentiated nature of different sustainable finance policies and their effects on firms' nonfinancial performance, an understudied relationship. We call on policymakers to target their climate policies at investors and to provide support directly to developing countries.