Unlocking Green Capital: The Role of Sustainable Financial Development in the Renewable Energy Transition of Emerging Markets

Abstract

Climate-related risks and environmental pressures are becoming increasingly difficult to ignore, pushing financial systems toward more sustainable approaches. This study looks at how green finance (GF) relates to sustainable development (SD) across seven emerging economies between 2010 and 2023. To deal with issues such as endogeneity and the dynamic nature of environmental outcomes, a Two-Step System Generalized Method of Moments (GMM) approach with Windmeijer-corrected standard errors is applied.

The results point to a clear pattern. Instruments such as green bonds and environmental funds are associated with improvements in sustainability, largely through their role in expanding renewable energy use and lowering carbon intensity. At the same time, the effect is not uniform across countries. It appears to depend quite strongly on the level of financial development (FD).

In economies with more developed financial systems, green investments tend to produce stronger environmental outcomes. This suggests that financial development plays an enabling role, shaping how effectively green finance translates into real-world impact. Taken together, the findings highlight the need to align green finance initiatives with broader financial sector improvements, particularly in emerging markets where institutional conditions vary widely.