Renewable energy has emerged as a tool for economic freedom in the new financial era where economies are investing in new technologies. While much of the existing research has focused on renewable energy consumption as a benchmark for development, less attention has been given to the financial investments fueling this progress and their broader impact on financial systems. This study examines the impact of renewable energy financing (REF) on financial development in 33 emerging economies from 2000 to 2022.
The study adopts the Generalized Method of Moments (GMM) approach and Granger Causality to make an analysis, account for potential endogeneity, ensure robustness and make inferences.
The findings show that while REF positively influences financial markets (FM), it has a detrimental effect on financial institutions (FI) and overall financial development (FD). However, regional analyses revealed differing patterns. In Africa, REF had a positive but insignificant effect on FD, while financial openness and government capital formation showed strong positive associations with FD and FM, respectively. In contrast, REF had a significant negative effect on FD in Asia, with no significant impact on FI and FM. Notably, institutional quality (IQ) moderated these relationships by reducing the negative impact of REF on FD and FI and enhancing its positive effect on FM.
These results suggest that the influence of renewable energy financing on financial development is context-dependent and strongly shaped by institutional quality. Policy suggestions encourage policymakers in emerging economies to prioritize governance reforms, strengthen financial institutions and promote market-based green finance instruments to ensure that renewable energy financing supports sustainable financial development.
Existing studies have predominantly used renewable energy consumption in their assessment, while this study provides novel evidence on how renewable financing has impacted financial markets and institutions.
