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| Why Do We Need Green Finance? Global Empirical Facts and Theoretical Explanations in an Economic Growth Framework |
| WEN Shuyang, ZHANG Lin, LIU Xiliang
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| Institute of Chinese Financial Studies, Southwestern University of Finance and Economics |
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Abstract Green development is a must for human progress, and the role of finance in green development is receiving more attention. “Green finance” generally refers to financial products, markets and policies related to environmental protection and sustainable development. In academia, the concept of green finance is closely related to environmental and climate finance and overlaps sustainable finance and socially responsible investing (SRI). In the past two decades, the development of global green finance has significantly advanced, and green finance issues have received increasing attention. However, theoretical research in this field lags behind. Although the number and proportion of studies have grown rapidly,and the economic theory of green finance is weak. Scholars struggle to rigorously answer the fundamental question of why we need green finance. According to the general principles of economics, the externality of pollution indicates that the main force of environmental protection should be the public sector rather than the financial system. However, more and more countries are choosing green finance. What is the economic intuition behind this phenomenon? An in-depth discussion of these issues forms the basis for effective policymaking and the development of green finance theory.
This study uses data on listed companies worldwide to estimate the debt ratio of green enterprises in various countries as a proxy indicator of green finance. Then, combining that with fiscal expenditure data from the United Nations, we examine the changes in global green finance and government expenditures on environmental protection. The results show that in the past 20 years, total global government expenditures on environmental protection have slightly increased, but the ratio of this expenditure to GDP has a downward trend. Meanwhile, the scale and ratio of green finance to GDP have continued to increase, and the development level of green finance has been in line with the economy. Further cross-country panel data analysis shows that green finance effectively promotes long-term economic growth, showing obvious heterogeneity with green fiscal investment. On the basis of these findings, we ask whether green finance differs from traditional public finance in terms of economic principles?
This study builds a multisector general equilibrium growth model that includes residents, enterprises, financial sector and government. It depicts the dynamic relationship between green fiscal investment, green finance and economic growth and reproduces the abovementioned facts. The theoretical analysis shows that, firstly, green finance has advantages for long-term growth. It can mitigate the deficiency of public services subject to congestion and achieve high-quality economic development. Secondly, there is a scale threshold above which firms voluntarily choose to protect the environment by using green finance without government intervention. Subsidies for green credit can promote firms' green investment and enable the economy to reach a higher steady state. Thirdly, a combination of green financial and fiscal policies to guide fiscal investment in the initial stage of economic development and gradually strengthen the promotion of green finance in later stages can speed economic growth, achieve a higher steady-state capital stock level, and meet the goal of high-quality economic development. This study answers the question of why we need green finance from the economic theory perspective. It addresses the basic theoretical shortcomings in the field of green finance, providing basic theoretical support for the development of green finance and a useful analytical framework for further theoretical research on green finance.
This article also has implications for future research. For instance, the next important academic question to address is how green finance affects financial institutions. Although this article discusses the macroeconomic benefits of green finance, it does not explore whether financial institutions have inherent incentives to engage in green finance. There is some empirical evidence in the literature, but the theoretical basis of this problem is still unclear. Whether the implementation of green finance policies can be incentive compatible is an important direction for future research.
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Received: 28 June 2021
Published: 01 January 2022
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