Impact of Financial and Economic Determinants on Green Finance in Developed Countries: A Panel Data Analysis

Abstract

Green finance has emerged as a central pillar in the global transition toward sustainable development and low-carbon economic systems. Developed economies, characterized by advanced financial markets and strong institutional frameworks, play a pivotal role in mobilizing capital for environmentally sustainable investments. This study examines the impact of financial and economic determinants on green finance in selected developed countries over the period 2005–2023 using panel data econometric techniques. Green finance is measured through indicators such as green bond issuance, climate finance flows, and sustainable investment volumes. The key explanatory variables include financial development, economic development (GDP per capita), banking sector development, and foreign direct investment (FDI). The study integrates theoretical perspectives including the Environmental Kuznets Curve (EKC), Sustainable Finance Theory, Financial Intermediation Theory, Environmental Learning Theory (ELT), and the Natural Resource Curse (NRC) hypothesis to construct a comprehensive analytical framework. Using fixed effects and random effects models, supported by Hausman specification tests, panel unit root tests, and cointegration analysis, the empirical results demonstrate that financial development and banking sector development significantly promote green finance by improving capital allocation efficiency and expanding sustainable lending mechanisms. Economic development positively influences green finance through higher environmental awareness, institutional quality, and policy commitment. The effect of FDI varies depending on regulatory stringency and sectoral allocation. The findings contribute to the environmental finance literature by identifying structural macro-financial drivers of green finance in advanced economies and offering policy recommendations to strengthen sustainable financial systems and accelerate climate investment mobilization.