Policy-driven transition risks: Evidence from ESG investment policies

Abstract

This study investigates whether ESG investment policies have introduced transition risks and its transmission mechanisms. We employ the China's Green Investment Guidelines launched in 2018 as a quasi-natural experiment. Based on the continuous difference-in-differences approach, we find evidence that the ESG investment policy shows a positive association with market risk, suggesting the existence of policy-driven transition risks. The underlying mechanism on the firm level is driven by the external pressure and internal resource reallocation. Further analysis shows that ESG investment policies mainly function through channeling resources toward green enterprises, and do not materially increase the stranded risk of brown assets. This study offers valuable insights into the understanding of policy-driven transition risks and significant implications for low-carbon development.