Behavioural Policy Uncertainty & Green Investment

SKBI Newsletter | November 2025  

Behavioural Policy Uncertainty & Green Investment

Research Perspective

Industry Insights

Mengyu Wang,
Senior Research Fellow at Sim Kee Boon Institute for Financial Economics

Jeffrey Jaensubhakij,
Advisor to GIC

Environmental policies are among the most important drivers of the green transition. However, could policymaking itself be subject to the common decision-making pitfalls (i.e., behavioural biases) of individuals, and if so, what could be the impact? A recent SMU study sheds light on the behavioural foundation of policymaking by investigating how China’s environmental subsidies affect firms’ green R&D.

With extreme climate events affecting almost every part of the world, governments are making increasingly complicated policies to mitigate the negative impacts of climate change. We speak to Jeffrey Jaensubhakij on his thoughts on investments in the face of policy uncertainties.

Key Messages:

• Environmental subsidies are a common policy tool. In China, more subsidies are allocated to firms in cities with worse air pollution, as measured by the Air Quality Index (AQI), to combat air pollution.
• This policy, though seemingly reasonable, could be subject to a common recency bias, where decisions are made based on the most recent and salient information (e.g., AQIs) while ignoring less salient information (e.g., weather).
• However, weather affects AQI readings. As a result, weather-driven AQI fluctuations induce subsidies to fluctuate, creating policy uncertainty.
• Although green subsidies stimulate firms to invest in green R&D, weather-induced uncertainty negates approximately half of this effect. Policy uncertainty also reduces green employment.

Overall, policymaking could be vulnerable to behavioural biases, leading to policy uncertainty that undermines the good intentions of the policy. This is particularly relevant for environmental policies, where some information appears more salient than others.

Wang, M., Wurgler, J. and Zhang, H., 2026. Policy uncertainty reduces green innovation. Journal of Financial Economics,175

Key Challenges:

• Policy uncertainty poses a key challenge for investments by creating if and when problems for investment and divestment decisions. These problems, such as unforeseeable changes in carbon prices, often prompt more conservative investments. Mengyu’s research provides important insights on this issue.
• Policy uncertainty may arise from conflicting policy goals. For instance, coal was at one time under tightening government regulation. However, due to concerns about energy security, governments changed their focus: coal was no longer banned. Investment in coal has produced high returns in recent years.
• Once policy uncertainty is removed, decision-making will return to economic rationality, which would lead to clarity in investments. This is seen in markets like Europe, where certainty in carbon policy encourages favourable investment decisions.

As a result, “we always have our eye on politics and the incidence of costs—not just locally but also overseas—to determine the next best investment opportunity”, says Jeffrey.

Meet the Author:
Dr. Mengyu Wang is a Senior Research Fellow at the Sim Kee Boon Institute for Financial Economics, SMU. Prior to this, she held a postdoctoral fellowship at Tsinghua University. Her research interests include corporate finance, environmental finance, and capital allocation.

Meet the Expert:
Dr Jeffrey Jaensubhakij is Advisor to GIC Pte Ltd. He was previously Group GIO at GIC where he oversaw capital allocation across asset classes and regions and across internal and external investment mandates. Over the course of his career, he headed GIC’s Public Markets Investments team, its European Operations and Global Equites and North American Equities teams. He holds a PhD in Economics from Stanford University and has been on the SKBI Advisory Board since 2021.

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The Sim Kee Boon Institute generates financial economic research through multidisciplinary collaborations involving not only the SMU community, but also research talent from around the world as well as industry and public-sector partners. The Institute will focus its efforts on the areas of (1) Market Innovations and FinTech, (2) Sustainability and Green Finance, and (3) Household Finance and Behaviour. To maintain relevance to finance practitioners and policy-makers, SKBI also adopts a view on Asian and global economic trends. View SKBI’s research. 

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