Why Binding Net-Zero Laws Mobilize Massive Green Finance Across Global Markets

Legally binding net-zero climate laws significantly boost sustainable investment by reshaping investor expectations, raising the share of ESG assets by up to five percentage points within five years. The study finds this surge is driven not by price jumps but by higher green investment inflows and increased green bond issuance, especially in countries with strong institutions.

A new working paper by the Asian Development Bank (ADB) and the Organisation for Economic Co-operation and Development (OECD) argues that one of the most decisive tools for mobilizing climate finance is not technology or political rhetoric, but legislation itself. Drawing on a novel dataset that combines national climate laws with global mutual fund holdings, the researchers show that when countries enshrine net-zero commitments into law, investors treat these as durable, credible signals. The result is a swift reallocation of capital toward sustainable assets. Within five years of adopting a net-zero law, the share of ESG assets in mutual fund portfolios rises by nearly five percentage points, equivalent to mobilizing about 1.8% of GDP in green finance through mutual funds alone. This effect is identified using a rigorous staggered difference-in-differences framework designed to isolate legal impacts from broader market trends.

Why Net-Zero Laws Matter Most

The study distinguishes sharply between qualitative climate laws and quantitative ones. While qualitative laws, focused on governance or process, have only mild or statistically insignificant effects, quantitative laws that embed binding emissions-reduction targets reshape investor expectations. Among them, net-zero laws stand out: they commit governments to long-term decarbonization trajectories that extend beyond electoral cycles, making policy reversals costlier and less likely. Investors interpret these laws as credible commitments, partly because they create judicial avenues for accountability. Interestingly, the full effect does not materialize immediately. It accelerates after two to three years as implementation mechanisms, advisory bodies, and enforcement structures begin to take shape, turning legislative text into actionable climate governance.

Institutional Strength as a Game-Changer

The paper underscores that the mere adoption of a law is not enough. Its impact depends heavily on the strength of national institutions. In economies with high government effectiveness, characterized by strong bureaucratic capacity, regulatory quality, and policy consistency, net-zero laws generate large, persistent increases in ESG investment. But in countries with weaker institutions, the same laws trigger little to no measurable change, highlighting that credibility is a function of both legal form and administrative capability. Evidence also shows that political turnover does not reduce ESG investments in countries with net-zero laws, suggesting that these laws significantly reduce policy uncertainty. Supporting this, the authors document a decline in return volatility for global green bond funds following the enactment of net-zero legislation, another sign that markets perceive lower long-term risk.

Bond Markets Lead the Transition

The shift toward sustainable finance is not uniform across asset classes. Bond funds, particularly actively managed ones, react most strongly to climate laws. The increase in ESG bond holdings is several times larger than the change observed for equity funds. Much of this responsiveness stems from the green bond market’s structure, where clearly labeled, project-specific instruments give investors higher confidence. Corporate green bond issuance also rises significantly after net-zero laws are enacted, typically beginning within two quarters and peaking around two years later. This indicates that climate legislation stimulates both demand and supply: investors channel more capital into green funds while firms expand the availability of climate-aligned financial instruments.

More Volume, Not Higher Prices

One of the most striking findings is that climate laws do not cause significant jumps in green asset prices. Returns on green funds relative to non-green funds remain largely unchanged after adoption, implying that the rise in ESG shares is driven by volume effects, increased inflows, and greater issuance rather than short-term market repricing. This reinforces the idea that climate laws primarily anchor long-term expectations, not trigger asset bubbles. Ultimately, the study concludes that legally binding climate commitments play a pivotal role in mobilizing sustainable finance, especially when paired with strong institutions and reliable sustainability data. Such laws reduce uncertainty, signal policy continuity, and coordinate both investors and issuers toward a low-carbon future.