Green economic complexity, biodiversity finance, and the load capacity factor: The moderating role of climate-related financial policy

Abstract

The load capacity factor (LCF) is a preferred sustainability indicator due to its ability to measure the ecological footprint and the biocapacity to support both. However, two drivers of ecological outcomes are gaining popularity, green economic complexity (GEC) and biodiversity finance (BF), but these are both explored in different literatures. The impacts on the climate of their financial policy framework have not been proven. This study estimates the interaction effects between GEC and BF on LCF and investigates if any moderation of these relationships exists between GEC and BF through the climate-related financial policy index (CRFPI). Based on the concepts of ecological modernization, finance–growth and legitimacy and institutional theories it examines a balanced panel of 101 countries for 23 years. Cross-sectional dependence, slope heterogeneity, stationarity and cointegration are established by second generation diagnostics followed by pooled OLS, random-effects, GMM and dynamic fixed-effects estimators. After controlling for country heterogeneity, both variables positively influence the LCF, with a 1-SD increase in BF and GEC resulting in an increase of LCF of approximately 0.35 and 0.11 respectively. It is lowered in contrast with digitalization, population growth and urbanization. The interaction terms are negative, contradicting the moderation hypotheses, indicating that the ecological returns to green capabilities and biodiversity capital are negative as the financial regulation becomes more carbon-based. The study provides the first country-level evidence of the connection between biodiversity finance and green complexity to the LCF in an institutional-moderation approach.