Greening thy Neighbour: How the US Inflation Reduction Act Drives Climate Finance Globally

Using granular data on global investment funds in difference-in-differences regressions around the announcement of the US Inflation Reduction Act (IRA), we identify a novel international spillover channel of green industrial policies. Sustainable global investment funds received more inflows upon the act announcement, in turn increasing their cross-border portfolio investments worldwide. Recipient economies better prepared to address climate change benefited most from sustainable global funds’ additional investments. Our results are stronger for funds with a larger portfolio share invested in the US and in IRA-targeted industries. Yet, we see strong international spillovers even for non-US domiciled sustainable funds investing entirely outside the US. Thus, global investment funds have become an important conduit for the international spillover of climate policies.