Environmental factors and capital flows to emerging markets

José Aurazo, Rafael Guerra, Pablo Tomasini, Alexandre Tombini and Christian Upper

No 1308, BIS Working Papers from Bank for International Settlements

Abstract: This paper examines the impact of environmental factors on international capital flows – specifically portfolio, bank, and foreign direct investment (FDI) inflows – to emerging market economies (EMEs). Using two complementary approaches, we first analyse how recipient country factors influence capital flows for 21 EMEs, finding that EMEs with lower exposure to extreme weather events, a greener energy mix, more and stronger climate-related policies tend to attract greater capital inflows. Second, using bilateral data for FDI and bank flows, we explore the role of sending country factors (advanced economies, AEs) in determining capital inflows to EMEs. The results suggest that stricter environmental regulations in AEs lead to increased capital inflows to EMEs with weaker green regulations. This suggests an "emission shifting" effect. At the same time, though, they also route more investment to EMEs with a greener energy mix. These findings underscore the significance of environmental factors in shaping international capital flows.

Keywords: environmental factors; capital flows; emerging markets; energy mix (search for similar items in EconPapers)
JEL-codes: F21 F23 F64 (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-env, nep-ifn and nep-opm
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