A Step Towards SDGs 6, 13 and 15? Revisiting the Environmental Effectiveness of Green Finance Under Market Sophistication in OECD Countries

Abstract

To attain SDGs 6, 13 and 15, there is a need for green financing and efficient financial infrastructure. While the use of green bonds has grown significantly across the Organisation for Economic Cooperation and Development (OECD), environmental problems, such as CO 2 emissions, water stress and deforestation, have remained constant. The statistical evidence is based on: (i) a panel of 23 OECD economies and (ii) both System‐Generalised Method of Moments (System‐GMM) and Instrumental Variable Quantile regressions (IVQR). The findings indicate that green bond financing does not lead to environmental improvements in OECD countries. In some specifications, green bonds are associated with higher environmental pressures, particularly when market and project‐screening mechanisms are weak. However, the System‐GMM interaction results suggest that greater market sophistication can improve the environmental effectiveness of green bonds in relation to CO 2 emissions and deforestation. The IVQR results reveal more uneven distributional patterns: green bonds increase water stress at intermediate quantiles, market sophistication independently reduces water stress at moderate levels of environmental pressure and the interaction between green bonds and market sophistication is generally insignificant across the conditional distributions. This research contributes to the sustainable development literature by linking green finance to SDGs 6, 13 and 15 through an assessment of CO 2 emissions, water stress and deforestation, while showing that the environmental consequences of green finance depend on market conditions and the type of environmental pressure considered.