Towards a green economy: Investigating the impact of
sustainable finance, green technologies, and environmental
policies on environmental degradation
Literature Review
1. Environmental Degradation and Climate Change
Environmental degradation has become one of the most pressing challenges of the
21st century, marked by deforestation, biodiversity loss, rising greenhouse gas (GHG)
emissions, and pollution of air, water, and soil (Brown et al., 1987; Tian et al., 2004).
Anthropogenic activities driven by population growth, industrialization, and
unsustainable resource use have intensified this degradation, threatening ecosystems
and human health alike. Urban populations are particularly vulnerable, facing air
pollution levels often exceeding WHO’s safe thresholds (Heger et al., 2022).
2. Sustainable Finance (SF) and Environmental Sustainability
Sustainable finance is defined as the integration of environmental, social, and
governance (ESG) considerations into financial decision-making. SF supports capital
allocation toward projects that foster environmental protection and resource efficiency
(Barbier, 2010). Empirical research (Chin et al., 2024; Smith, 2018) suggests that SF
plays a vital role in influencing both the demand and supply sides of green
investments. This dual effect encourages consumers to adopt greener choices and
motivates producers to develop cleaner technologies. In the present study, sustainable
finance was found to have a significant negative coefficient (-0.033) on
environmental degradation, emphasizing its effectiveness.
3. Green Technology Innovation (TI)
Green technology innovation has emerged as a critical pathway to achieving
environmental goals. TI enables cleaner production, energy efficiency, and
sustainable industrial practices. It has shown a strong negative impact (-0.132) on
environmental degradation in this research. Prior works (Johnson et al., 2020; Chen
and Yang, 2024) corroborate these findings by linking TI to lower emission intensities
and enhanced environmental quality.
4. Green Energy (GE)
Green energy, including renewable sources like solar, wind, hydro, and biomass, is
crucial to decarbonizing the energy sector. GE plays a vital role in transitioning from
fossil fuels and reducing CO₂ emissions. It was found to have a negative coefficient
(-0.075), indicating its beneficial impact. Previous literature aligns with this result,
highlighting how renewable energy deployment reduces greenhouse gas emissions
while supporting green development (Gao et al., 2023).
5. Green Growth Index (GGI) and Climate-Related Financial Policy
Index (CRFPI)
The Green Growth Index (GGI) had the most substantial effect (-0.686) on
reducing environmental degradation, suggesting that broad-based sustainability efforts
that include environmental and economic reforms have the greatest potential. In
contrast, the Climate-Related Financial Policy Index (CRFPI) showed a slight
positive coefficient (0.029)—an unexpected result potentially indicating that some
policies may still be in formative or transitional phases, or are not yet effectively
implemented.
6. Government Spending and Financial Globalization
The literature also emphasizes the complex roles of government spending and
financial globalization. While public investment is essential in financing
environmental infrastructure and green R&D, its effectiveness may be undermined by
inefficiencies or policy misalignments. Similarly, financial globalization may either
support green finance through capital inflows or hinder sustainability due to
speculative or extractive financial practices.
7. Gaps in the Literature
Although the literature has acknowledged the individual effects of SF, TI, and GE,
limited research addresses their combined and interacting impacts, especially across
countries with differing development levels. The present study fills this gap by
integrating multiple sustainability dimensions over a large dataset of 50 countries
across 23 years, offering a holistic view of environmental finance-policy interactions.
Data and Methodology
1. Data Sources and Sample
This study uses a comprehensive panel dataset covering 50 countries from 2000 to
2022, selected based on the availability of key variables. The data integrates multiple
reputable international sources:
World Bank Development Indicators (WDI)
International Energy Agency (IEA)
IMF Climate Policy Databases
Global Footprint Network (GGI)
National Statistical Agencies and Environmental Performance Reports
2. Variables Used
Expected
Variable Description
Sign
Environmental Degradation Proxy using composite indicators like CO₂
Dependent
(ED) emissions, deforestation, and pollution
ESG-based financial flows, green bonds,
Sustainable Finance (SF) Negative
and policy measures
Green Technology Patents, R&D expenditure in green
Negative
Innovation (TI) technologies
% of renewable energy in total final
Green Energy (GE) Negative
energy consumption
Index of national-level sustainability
Green Growth Index (GGI) Negative
performance
Climate-Related Financial Score indicating robustness of climate-
Mixed
Policy Index (CRFPI) related financial policies
% of GDP spent on environment and
Government Spending (GS) Moderator
sustainability
Capital account openness, cross-border
Financial Globalization (FG) Negative
investment indicators
3. Econometric Techniques
To ensure robustness and validity, the study applies multiple advanced econometric
methods:
Panel Unit Root Tests: To assess the stationarity of the variables (Levin–Lin–
Chu, IPS)
Panel Cointegration Tests: To detect long-run equilibrium relationships
(Pedroni, Kao)
Generalized Method of Moments (GMM): Dynamic panel estimation
technique used to control for endogeneity and serial correlation while
estimating the causal impacts.
Paper Summary
This research investigates the complex relationships among sustainable finance,
technological innovation, green energy adoption, and financial and policy frameworks
in mitigating environmental degradation across 50 countries over the period 2000–
2022. Using robust econometric methods—including GMM, unit root testing, and
cointegration analysis—the study empirically evaluates how these variables interact
to either exacerbate or alleviate environmental harm.
Key findings include:
Sustainable finance significantly reduces environmental degradation (−0.033).
Green technology innovation (−0.132) and green energy adoption (−0.075)
both contribute to lowering emissions and pollution.
The Green Growth Index has the largest positive environmental impact
(−0.686).
Surprisingly, the Climate-Related Financial Policy Index shows a slightly
positive effect (0.029), warranting further investigation into policy
implementation effectiveness.
Government spending and financial globalization influence the
effectiveness of sustainability efforts, with mixed results.
This study highlights the importance of integrating financial mechanisms,
technology, and policy frameworks to combat environmental degradation. Its cross-
country design and 23-year dataset offer rare global insights and guide policymakers
toward holistic and tailored strategies for green transition and sustainable
development.
