Governing global capital: How state capacity and climate policy credibility attract sustainable investment

Abstract

Can governments steer global capital toward public goals in an era of market-driven finance? This paper examines how state capacity and institutional credibility enable governments to attract sustainable investment through climate policy. Using the adoption of climate policies across 94 economies, we apply a triple difference-in-differences design to distinguish the effects of policy announcements, implementation, and demonstrated performance. We find that announcements increase sustainable investment flows by 24 basis points per week even before policies take effect, while the effect rises to 45 basis points following implementation. Demonstrated policy performance further amplifies these flows: above-median improvements in emissions, renewable energy generation, and green innovation attract an additional 13–16 basis points per week. By contrast, improvements in financial returns and risk do not explain these flows. The study bridges the literature on state capacity and sustainable finance, showing that credible, high-capacity governance is foundational for mobilizing private capital toward climate goals—a critical insight for designing effective climate governance.