The nexus of foreign aid, institutional quality, and climate‐related financial policies: Evidence from the global database

Abstract This article represents the first endeavor to establish a connection between foreign aid and climate‐related financial policies (CRFPs) within the European region. The findings are critical to suggest policy implications for governments in making capital flow effective, especially in mitigating environmental degradation. CRFPs represent the count of climate‐related financial policies implemented by 28 European countries annually from 2010 to 2021. We utilize four distinct indicators to capture foreign aid, namely net foreign aid, net Official Development Assistance (ODA) received development index, net ODA received share, and net ODA received per capita. Our research reveals that foreign aid has an adverse effect on CRFPs, as evidenced across all four measures of foreign aid. Notably, the net ODA received share demonstrates a nonlinear relationship with CRFPs. Additionally, we conducted a study to examine how institutional quality moderates the association between financial aid and the implementation of CRFPs. The findings suggest that good institutional quality amplifies the impact of foreign aid on CRFPs.